Dynamic taxes and quotas with learning

We compare dynamic taxes and quotas when a regulator and non-strategic firm have asymmetric information. The regulator learns by using either a tax or a quota that can be slack. With a tax, the information asymmetry is resolved in one period. Optimal learning using a quota is less transparent, but we show that learning never takes place gradually. In the first period, the regulator either acts myopically, or he tries to improve his information, but he never experiments in subsequent periods. We use this result to assess the informational advantage of taxes compared to quotas under asymmetric information. (C) 2003 Elsevier B.V. All rights reserved.