Instrument-Based vs. Target-Based Rules
29 Pages Posted: 3 Apr 2018
Date Written: April 2, 2018
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.
Keywords: Policy Rules, Private Information, Delegation, Mechanism Design
JEL Classification: D02, D82, E58, E61
Suggested Citation: Suggested Citation