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Rules without Commitment: Reputation and Incentives
[The Theory of Optimal Delegation with an Application to Tariff Caps]

Author

Listed:
  • Alessandro Dovis
  • Rishabh Kirpalani

Abstract

This article studies the optimal design of rules in a dynamic model when there is a time inconsistency problem and uncertainty about whether the policy maker can commit to follow the rule ex post. The policy maker can either be a commitment type, which can always commit to follow rules, or an optimizing type, which sequentially decides whether to follow rules or not. This type is unobservable to private agents, who learn about it through the actions of the policy maker. Higher beliefs that the policy maker is the commitment type (i.e. the policy maker’s reputation) help promote good behaviour by private agents. We show that in a large class of economies, preserving uncertainty about the policy maker’s type is preferable from an ex ante perspective. If the initial reputation is not too high, the optimal rule is the strictest one that is incentive compatible for the optimizing type. We show that reputational considerations imply that the optimal rule is more lenient than the one that would arise in a static environment. Moreover, opaque rules are preferable to transparent ones if reputation is high enough.

Suggested Citation

  • Alessandro Dovis & Rishabh Kirpalani, 2021. "Rules without Commitment: Reputation and Incentives [The Theory of Optimal Delegation with an Application to Tariff Caps]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 2833-2856.
  • Handle: RePEc:oup:restud:v:88:y:2021:i:6:p:2833-2856.
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    File URL: http://hdl.handle.net/10.1093/restud/rdab006
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    Citations

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    Cited by:

    1. Xiaonan Zhang & Honglei Li, 2023. "Reputation incentive model of open innovation of scientific and technological-based SMEs considering fairness preference," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-11, December.
    2. Ryo Arawatari & Tetsuo Ono, 2023. "International coordination of debt rules with time‐inconsistent voters," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(1), pages 29-60, February.
    3. Uchida, Yuki & Ono, Tetsuo, 2021. "Borrowing to finance public investment: a politico-economic analysis of fiscal rules," MPRA Paper 115844, University Library of Munich, Germany, revised 31 Dec 2022.
    4. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    5. Carranza-Ugarte, Luis & Díaz-Saavedra, Julián & Galdon-Sanchez, Jose Enrique, 2023. "Rethinking fiscal rules," Journal of Comparative Economics, Elsevier, vol. 51(3), pages 833-857.
      • Luis Carranza Ugarte & Julian Diaz Saavedra & Jose Enrique Galdon-Sanchez, 2021. "Rethinking fiscal rules," ThE Papers 21/14, Department of Economic Theory and Economic History of the University of Granada..
    6. Haikun Han & Juqin Shen & Bo Liu & Han Han, 2022. "Dynamic Incentive Mechanism for Large-scale Projects Based on the Reputation Effects," SAGE Open, , vol. 12(4), pages 21582440221, October.
    7. Kobielarz, Michał L., 2024. "A theory of international unions with exits," Journal of Economic Theory, Elsevier, vol. 215(C).

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