Working Paper: CEPR ID: DP12872
Authors: Marina Halac; Pierre Yared
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: policy rules; private information; delegation; mechanism design
JEL Codes: D02; D82; E58; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quality of information (L15) | Effectiveness of target-based rules (C52) |
| Precision of information (D83) | Effectiveness of target-based rules (C52) |
| Lack of private information (D82) | Preference for instrument-based rules (C36) |
| Bias of the agent (D82) | Benefit of target-based rules (E61) |
| Severity of punishment (K40) | Benefit of target-based rules (E61) |
| Optimal hybrid rule (C61) | Welfare (I38) |