Optimal regulatory control of early contract termination

We present a quantitative method to find jointly optimal strategies for an industry regulator and a firm who operate under exogenous uncertainty. The firm controls its operating policy in order to maximize its expected future profits whilst taking account of regulatory fines. The regulator aims to control the probability of the firm terminating production by imposing a closure fine which is as low as possible, while achieving the required reduction in probability. Our method determines the level of fine which establishes a Nash equilibrium in these non-zero-sum games under uncertainty.