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Discretion Rather than Simple Rules: the Case of Social Protection

Author

Listed:
  • Alvaro Forteza

    () (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)

  • Cecilia Noboa

    () (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)

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.

Suggested Citation

  • Alvaro Forteza & Cecilia Noboa, 2014. "Discretion Rather than Simple Rules: the Case of Social Protection," Documentos de Trabajo (working papers) 0814, Department of Economics - dECON.
  • Handle: RePEc:ude:wpaper:0814
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    File URL: http://cienciassociales.edu.uy/departamentodeeconomia/wp-content/uploads/sites/2/2014/11/0814.pdf
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    References listed on IDEAS

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    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, March.
    2. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
    3. Álvaro Forteza, 1999. "Government discretionary transfers and overinsurance," Estudios de Economia, University of Chile, Department of Economics, vol. 26(1 Year 19), pages 27-44, June.
    4. Rofman, Rafael & Oliveri, Maria Laura, 2012. "Pension coverage in Latin America : trends and determinants," Social Protection and Labor Policy and Technical Notes 70926, The World Bank.
    5. repec:oup:jeurec:v:15:y:2017:i:2:p:245-295. is not listed on IDEAS
    6. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-1182, December.
    7. Daron Acemoglu & Matthew O. Jackson, 2017. "Social Norms and the Enforcement of Laws," Journal of the European Economic Association, European Economic Association, vol. 15(2), pages 245-295.
    8. Rodrigo Ceni, 2014. "Informality and government enforcement in Latin America," Documentos de Trabajo (working papers) 14-21, Instituto de Economía - IECON.
    9. Loayza, Norman V. & Rigolini, Jamele, 2011. "Informal Employment: Safety Net or Growth Engine?," World Development, Elsevier, vol. 39(9), pages 1503-1515, September.
    10. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, August.
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    Cited by:

    1. Alvaro Forteza & Cecilia Noboa, 2015. "Tolerance to Tax Evasion," Documentos de Trabajo (working papers) 1015, Department of Economics - dECON.

    More about this item

    Keywords

    Discretion; Commitment; Simple Rules; Informality;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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