Instrument-Based vs. Target-Based Rules

61 Pages Posted: 12 Apr 2018

See all articles by Marina Halac

Marina Halac

Columbia University

Pierre Yared

Columbia Business School - Finance and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: April 2018

Abstract

We develop a simple 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 unconstrained rule relaxes the instrument threshold whenever the target threshold is satisfied.

Suggested Citation

Halac, Marina and Yared, Pierre, Instrument-Based vs. Target-Based Rules (April 2018). NBER Working Paper No. w24496. Available at SSRN: https://ssrn.com/abstract=3158936

Marina Halac (Contact Author)

Columbia University ( email )

Pierre Yared

Columbia Business School - Finance and Economics ( email )

3022 Broadway
Uris Hall
New York, NY 10027
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1
Abstract Views
108
PlumX Metrics