Industrial policy and politics

Recognizing the uncontrollable nature of the political system in a fine-tuning way, we derive simple constitutional rules for industrial policies which take into account simultaneously the inefficiencies of the political system and informational asymmetries of regulators. We apply this methodology to the regulation of natural monopolies. We consider a two-type political system with the majority rule. We study how the chosen cost-reimbursement rules and pricing rules which characterize regulation are affected by constitutional choices such as public ownership or privatization, creation of incentives for regulators or not, price discrimination or not.