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Discretion Rather than Simple Rules: the Case of Social Protection

Alvaro Forteza () and Cecilia Noboa ()

No 814, Documentos de Trabajo (working papers) from Department of Economics - dECON

Abstract: We present a simple model of a benevolent government that provides insurance to risk averse individuals. As in macroeconomics, commitment to fully contingent rules is better than discretion, but when the government can only commit to simple rules, discretion may be the best available option. The model provides a simple albeit precise characterization of discretion and commitment to a simple rule in the context of social protection, showing when and why discretion may be better than commitment. We argue that the forces highlighted in our model can provide a rationale for several highly distortive policies often observed in the real world in weak institutional environments.

Keywords: Discretion; Commitment; Simple Rules; Informality (search for similar items in EconPapers)
JEL-codes: E61 H20 H30 H50 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ias, nep-lam, nep-law, nep-mac and nep-pbe
Date: 2014-08
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