DP12872 Instrument-Based vs. Target-Based Rules
Author(s): | Marina Halac, Pierre Yared |
Publication Date: | April 2018 |
Keyword(s): | delegation, mechanism design, Policy Rules, private information |
JEL(s): | D02, D82, E58, E61 |
Programme Areas: | Industrial Organization, Monetary Economics and Fluctuations, Macroeconomics and Growth |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=12872 |
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.