Signaling rather than incentive mechanism for entry regulation

The lack of complete information has been considered as a barrier to the optimal regulation. This paper shows that this is true for price regulation, but not for entry regulation. The performance of an entry regulation under asymmetric information can be better than that under complete information, if the government uses signaling mechanism rather than incentive mechanism. The main difference between screening and signaling is who initiates information transmission process. Contrary to the incentive mechanism for the optimal price regulation, the signaling mechanism induces the regulated firm to deviate from the monopoly behavior to signal itself and to trigger entry regulation. As a result, the social welfare under asymmetric information can be even higher than under complete information.