Should Rules be Simple?
AbstractThe principal argument of the paper is that in an incomplete information setting, where the private sector lacks information on goverment objectives and has to learn about the policy rule by direct observation and estimation, simple `sub-optimal' rules may outperform the more complicated rule that is optimal under complete information. This result is demonstrated by simulations using an overlapping contract rational expectations model. The paper thus provides some formal reasoning to support arguments for simplicity associated with credibility and the need for the private sector to be able to monitor policy.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 515.
Date of creation: Mar 1991
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