Optimal risk regulatory policy in the development of a geological disposal facility

Oscar Nieto-Cerezo, Edoardo Patelli, Michael Beer

Research output: Chapter in Book/Report/Conference proceedingConference contribution book

Abstract

In this paper, we use a mathematical model based on the principal-agency theory to design risk regulatory policies in the implementation of a complex energy project under two cases; moral hazard and risk aversion and moral hazard and limited liability. The risk regulation aims to reduce the probability of accident as a result of contractor’s risky activities and is defined by three policies; level of effort, transfer and fine. Under risk aversion, the regulator implements the second best level of effort with fine equal to damage cost. The optimal transfer extracts all the rent from the contractor and increases with the risk aversion coefficient of the contractor and the variance of the hazard. Under limited liability, the regulator implements a higher second best level of effort which increases with the weight parameter and the damage cost. A higher effort requires a higher fine and the optimal transfer leaves a liability rent which increases with the damage cost and the weight parameter.

Original languageEnglish
Title of host publicationSafety and Reliability of Complex Engineered Systems - Proceedings of the 25th European Safety and Reliability Conference, ESREL 2015
EditorsEnrico Zio, Luca Podofillini, Wolfgang Kröger, Bruno Sudret, Božidar Stojadinović
Pages2781-2788
Number of pages8
Publication statusPublished - 10 Sep 2015
Event25th European Safety and Reliability Conference, ESREL 2015 - Zurich, Swaziland
Duration: 7 Sep 201510 Sep 2015

Publication series

NameSafety and Reliability of Complex Engineered Systems - Proceedings of the 25th European Safety and Reliability Conference, ESREL 2015

Conference

Conference25th European Safety and Reliability Conference, ESREL 2015
CountrySwaziland
CityZurich
Period7/09/1510/09/15

Keywords

  • moral hazard
  • optimal contracts
  • agent
  • reliability
  • risk management
  • safety engineering
  • geological disposals

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  • Cite this

    Nieto-Cerezo, O., Patelli, E., & Beer, M. (2015). Optimal risk regulatory policy in the development of a geological disposal facility. In E. Zio, L. Podofillini, W. Kröger, B. Sudret, & B. Stojadinović (Eds.), Safety and Reliability of Complex Engineered Systems - Proceedings of the 25th European Safety and Reliability Conference, ESREL 2015 (pp. 2781-2788). (Safety and Reliability of Complex Engineered Systems - Proceedings of the 25th European Safety and Reliability Conference, ESREL 2015).