IDEAS home Printed from https://ideas.repec.org/p/eie/wpaper/1306.html
   My bibliography  Save this paper

Coordination, Efficiency and Policy Discretion

Author

Listed:
  • Facundo Piguillem

    (EIEF)

  • Anderson Schneider

    (TRC)

Abstract

Would citizens coordinate to punish a government when they observe suspicious behavior? This paper shows that under some circumstances such coordination is impossible. This fact has important implications for policy discretion. We study an environment with the following characteristics: 1) the aggregate productivity (fundamental) is stochastic, 2) only the government observes it and, 3) every agent privately receives a noisy signal about the fundamental. Item 1) implies that the best policy (tax on investment) with commitment is state contingent, while 2) and 3) make information incomplete. The main consequence of incomplete information is to make coordination among small anonymous agents harder. Since coordination is key to punishing the government when it deviates, independently of the accuracy of the signal, the set of sustainable payoffs is drastically reduced. Regardless of the size of the noise, state contingent policies cannot be an equilibrium. Moreover, the best equilibrium policy is independent of the fundamental, i.e., the optimal policy calls for strong rules rather than discretion. Finally, we show that the payoff of the best equilibrium without commitment is uniformly bounded away from the payoff of the equilibrium with commitment.

Suggested Citation

  • Facundo Piguillem & Anderson Schneider, 2013. "Coordination, Efficiency and Policy Discretion," EIEF Working Papers Series 1306, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2013.
  • Handle: RePEc:eie:wpaper:1306
    as

    Download full text from publisher

    File URL: http://www.eief.it/files/2013/03/wp-06-coordination-efficiency-and-policy-discretion.pdf
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eie:wpaper:1306. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Facundo Piguillem). General contact details of provider: http://edirc.repec.org/data/einauit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.