Study on Cooperative Game Model in Financial Regulation

Abstract

Financial regulation is effective to control financial risk and to promote economic development. However, when making decision separately, regulation institutions tend to maximize their own profit and ignore cooperation. Considering the factor of cost and profit, the paper studied the cooperation decision in financial regulation with the method of game theory and discussed cooperation possibility between central bank and regulatory institutions in different situations. The paper studied the situation which the fifth solution to replicator dynamic equation does not exist. We find a situation when cooperation probability of both sides increase as time goes on. In this circumstance, the profit that uncooperative party gains due to free ride is smaller than the profit when both of parties cooperate.