Deregulation with Consensus ∗ Sandro Brusco † Hugo Hopenhayn § July 2006 – Revised December 2006. Abstract We analyze the problem of eliminating an inefficient regulation, such as protection, in a dynamic model in which there is incomplete information and unanimous approval from all parties involved is nec- essary. Existing firms have heterogeneous cost, and efficiency requres some of them to shut down when the inefficient regulation is eliminated. The government can set up a revelation mechanism, giving subsidies and requiring firms to exit the market at a given time depending on the information collected. Under full commitment the optimal policy prescribes that some inefficient firms remain active and are subsidized. The optimal policy takes a simple form, with at most two times at which the firm are allowed to exit. ∗ We are very grateful to Matt Mitchell whose comments substantially improved the paper. † Department of Economics, State University of New York at Stony Brook, and Di- partimento di Scienze Economiche, Aziendali e Statistiche, Universit`a Statale di Milano. E-mail: sbrusco@notes.cc.sunysb.edu. § Department of Economics, University of California at Los Angeles. E-mail: hopen@econ.ucla.edu. 1