Discussion Paper Details

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Title: Instrument-Based vs. Target-Based Rules

Author(s): Marina Halac and Pierre Yared

Publication Date: April 2018

Keyword(s): delegation, mechanism design, Policy Rules and private information

Programme Area(s): Industrial Organization, Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: We develop a simple delegation model to study rules based on instruments vs. targets. A principal faces a better informed but biased agent and relies on joint punishments as incentives. Instrument-based rules condition incentives on the agent's observable action; target-based rules condition incentives on outcomes that depend on the agent's action and private information. In each class, an optimal rule takes a threshold form and imposes the worst punishment upon violation. Target-based rules dominate instrument-based rules if and only if the agent's information is sufficiently precise. An optimal hybrid rule relaxes the instrument threshold whenever the target threshold is satisfied.

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Bibliographic Reference

Halac, M and Yared, P. 2018. 'Instrument-Based vs. Target-Based Rules'. London, Centre for Economic Policy Research.