Optimal Collective Investment under Regulatory Uncertainty

This study focuses on optimal collective investment under VaR-type constraints that account for uncertainty in future regulatory requirements, characterizing optimal terminal wealth that combines a constant wealth region at the regulatory threshold with a Merton-type investment region. The study finds that high compliance probability, high small-wealth thresholds, or limited initial capital substantially reshape optimal returns and cause significant welfare losses. The distribution of welfare losses across a pool of heterogeneous investors is related to risk aversion composition and Pareto weights, with losses particularly pronounced when high risk-aversion investors dominate, and small contributors may bear losses far exceeding their contribution share.