Well, good laws should facilitate healthy incentives, also by restricting/discouraging bad behaviors, right? How do we engineer incentives for regulators to be willing to prioritize the broader and industrial engineering of healthier incentives?

Yes, make it so they get more money by being better citizens. That’s the only way it will ever work. I fail to see the sarcasm here.

In perfectly competitive markets noone makes a profit. As a result, capital is only allocated to imperfect markets, defined through various inefficiences: barriers to entry (monopolistic practices), information asymmetries (cheating), …

If you regulate away bad practices, capital will flow elsewhere. The level of equity investment in IT (and the valuations) is largely due to bad practices; fixing that will take away the OP’s favorite toys.

> In perfectly competitive markets noone makes a profit

Bit of an aside, but this is not true btw. Even in situations which most closely approximate what you describe, there is a positive, nonzero floor to profit taking. This is typically explained as the opportunity cost of allocating money, which is not just the known alternative investments you are giving up, but the unknown-unknown risks. Among certain schools of political economics, it is also taught that this is a built-in action bias towards holders of money. Essentially, the rich get richer (quantified).

Zero economic profit for the marginal producer; i.e. investors could as well work for hire and buy an ETF. In the long run.

My point on regulation shifting capital allocation away from a sector stands, regardless of detail.

They won't be good citizens so long as there is a considerable power disparity that is enabled by them having a lot more money. Giving them even more money would only make things worse.