Hidden Action and Learning-by-Doing in Models of Monopoly Regulation and Infant Industry Protection

Abstract

In this paper learning-by-doing involves a relationship whereby current period marginal cost is lower the greater is cumulative output prior to the current period only if the owner/manager expends effort in the learning process. This feature is incorporated into models of monopoly regulation and infant industry protection where it is found that, even when the policy maker is unable to observe owner/manager effort, the complete information solution is still attainable. This result is achieved using a mechanism in which a lump-sum subsidy is given, in the second period of a two period model, contingent on a particular output being produced. The novel aspect of this mechanism is that in the majority of the learning-by-doing literature temporary assistance is given which is not contingent on a particular output being produced.