Incentive regulation is sometimes made difficult by asymmetric information problems.

Question

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Asymmetric information problems can arise when a regulator doesn't have complete information about a company's costs and operations, making it difficult to design an effective incentive regulation scheme. This is because the regulator may have difficulty setting appropriate targets and rewards that incentivize the company to reduce costs and improve performance without creating unintended consequences.

Incentive Regulation Is Sometimes Made Difficult by Asymmetric Information Problems