Dynamic Regulation with Technological Progress

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.