Instrument-Based vs. Target-Based Rules

Marina Halac and Pierre Yared

No 24496, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D02 D82 E58 E61 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-mac and nep-mic
Note: EFG IFM ME POL
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Working Paper: Instrument-Based vs. Target-Based Rules (2018)
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