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A Theory of Rule Development

Author

Listed:
  • Glenn Ellison
  • Richard Holden

Abstract

This article develops a model with endogenously coarse rules. A principal hires an agent to take an action. The principal knows the optimal state-contingent action, but cannot communicate it perfectly due to communication constraints. The principal can use previously realized states as examples to define rules of varying breadth. We analyze how rules are chosen under several assumptions about how rules can be amended. We explore the inefficiencies that arise and how they depend on the ability to refine rules, the principal’s time horizon and patience, and other factors. Our model exhibits path dependence in that the efficacy of rule development depends on the sequence of realizations of the state. We interpret this as providing a foundation for persistent performance differences between similar organizations and explore the role of different delegation structures in ameliorating the effects of bounded communication. (JEL D23, K40, D83)

Suggested Citation

  • Glenn Ellison & Richard Holden, 2014. "A Theory of Rule Development," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(4), pages 649-682.
    • Handle: RePEc:oup:jleorg:v:30:y:2014:i:4:p:649-682.
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    File URL: http://hdl.handle.net/10.1093/jleo/ewt016
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    Citations

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    Cited by:

    1. Yuval Heller & Eyal Winter, 2016. "Rule Rationality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 997-1026, August.
    2. Andreas Blume & April Mitchell Franco & Paul Heidhues, 2021. "Dynamic coordination via organizational routines," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(4), pages 1001-1047, November.
    3. Gabriele Gratton & Richard Holden & Barton E Lee, 2022. "Political Capital [“Formal and Real Authority in Organizations]," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 38(3), pages 632-674.
    4. Dain C. Donelson & John Mcinnis & Richard D. Mergenthaler, 2016. "Explaining Rules‐Based Characteristics in U.S. GAAP: Theories and Evidence," Journal of Accounting Research, Wiley Blackwell, vol. 54(3), pages 827-861, June.
    5. Marco LiCalzi & Roland Mühlenbernd, 2019. "Categorization and Cooperation across Games," Games, MDPI, vol. 10(1), pages 1-21, January.
    6. Prat, Andrea & Dessein, Wouter, 2019. "Organizational Capital, Corporate Leadership, and Firm Dynamics," CEPR Discussion Papers 13513, C.E.P.R. Discussion Papers.
    7. Robert Akerlof & Richard Holden, 2016. "Movers and Shakers," The Quarterly Journal of Economics, Oxford University Press, vol. 131(4), pages 1849-1874.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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