Credibility May Require Discretion, Not Rules
Posted: 29 May 2001
We reexamine the common argument that rules produce greater credibility than discretion. Rules limit the actions of agents, restricting observations of the agents' preferences or types. In a second-best world, where rules cannot be everlasting, a regime of discretion in some periods may produce superior credibility and dominate a regime of rules.
Keyword(s): Rules, Discretion, Credibility, Regulation
JEL Classification: D78, D82, L51
Suggested Citation: Suggested Citation