This paper develops a dynamic regulatory model wherein the regulator can introduce an entrant into a market characterised by asymmetric information about cost and the outcome of the technological progress. Whe there is passive entry, it is found that the optimal contract has a kink, i.e. it is no longer fully separating, but has a pooling interval. In such a case, the social welfare increases as entry deterrence effect countervails the traditional incentive of the firms to misrepresent their true cost.
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Publisher Info
Paper provided by Indira Gandhi Institute of Development Research- in its series Papers with number
135.
Length: 26 pages Date of creation: 1996 Date of revision: Handle: RePEc:fth:indgan:135
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