ABSTRACTThis paper combines learning‐by‐doing and asymmetric information in a model of monopoly regulation with and without foreign competition. The principal source of the information asymmetry is unobservable firm effort in the learning process, although unobservable costs are also considered. The major result is that a post‐learning all‐or‐nothing output‐contingent lump‐sum subsidy can achieve the regulator's complete information welfare maximum. With foreign competition this model can best be thought of as one involving infant indust