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Instrument-Based vs. Target-Based Rules

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  • Halac, Marina
  • Yared, Pierre

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.

Suggested Citation

  • Halac, Marina & Yared, Pierre, 2018. "Instrument-Based vs. Target-Based Rules," CEPR Discussion Papers 12872, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12872
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    References listed on IDEAS

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    More about this item

    Keywords

    Policy rules; Private information; Delegation; Mechanism design;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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