Rules and temptations: which came first?

Elias L. Khalil

Journal of Institutional Economics, 2026, vol. 22, -

Abstract: For received theories, (suboptimal) temptations arise first, and, consequently, people set up rules or institutions to control them. Hence, any deviation from institutions is suboptimal. However, these received theories face an anomaly, coined here the ‘Holiday License Paradox’: Why would people who adopt optimal institutions turn around and designate ‘holidays’ (cheat days) that allow them to indulge in suboptimal consumption? To solve this paradox, this paper reverses the entry point: people first set up rules – whereas temptations are identifiable only with respect to those rules. This solution raises a new question: what is the origin of rules? People adopt rules to control ‘temerity’, i.e., overconfidence. This raises a further question: what is the origin of temerity? Temerity is a default heuristic expressing the optimal response in life-and-death decisions. Thus, temerity-as-heuristics is rather efficient on average. However, temerity can become excessive, and, at second approximation, people adopt rules to control temerity. Once we regard rules or institutions to come first, i.e., prior to temptations, it becomes possible to solve the Holiday License Paradox.

Date: 2026
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