Instrument-Based vs. Target-Based Rules

32 Pages Posted: 23 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 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: delegation, mechanism design, Policy Rules, private information

JEL Classification: D02, D82, E58, E61

Suggested Citation

Halac, Marina and Yared, Pierre, Instrument-Based vs. Target-Based Rules (April 2018). CEPR Discussion Paper No. DP12872. Available at SSRN: https://ssrn.com/abstract=3167237

Marina Halac (Contact Author)

Columbia University ( email )

Pierre Yared

Columbia Business School - Finance and Economics ( email )

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Uris Hall
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