Deregulation

It is well known in the theoretical literature on deregulation, that any informative signal will be used to give the firm appropriate incentives. This paper presents a model of deregulation that draws on the multi-task model of Holmstrom and Milgrom (1991). Sufficient conditions are derived for deregulation to be optimal despite the existence of a signal that contains information about the firm’s activity. The conditions ensure that there is an adverse response by the firm whenever the regulator tries to use the signal for incentives.