where β is an efficiency parameter known only to the firm, e (possibly multidimensional) is a cost-reducing effort, q = (q1,...,qn) is the vector of outputs, and ε stands for exogenous uncertainty about the final realization of the cost. The effort e is also unobserved by the regulator and is costly to the firm.
Unsurprisingly, authorities that neglect the asymmetry of information fail to deliver effective, cost-efficient regulation. To take two examples unrelated to market power, command-and-control in environmental regulation all over the world and judicial control of the business justification for layoffs in France have backfired by imposing high costs on the industry and thereby casting doubts on the reasonableness or sustainability of these policies. The same principle holds for industrial organization.