The choice of whether to regulate firms or to allow them to compete is key. If the demand is sufficiently inelastic, competition entails narrower allocative inefficiencies but, also, smaller expected profits and, thus, weaker incentives to invest in cost reduction. Hence, deregulation should be...

A key aspect of institutional design is the degree of accountability to which the officials involved in regulation are subjected. Elected officials strive for re-election, appointed ones are career-concerned. Provided that the effort exerted to uncover the firm's unknown cost is sufficiently...