Download Current Topics of Economic Research

Rules vs. Discretion
Motivation: capital supply vs
labor supply
• t labor supply depends on (1-t)wt
• t capital supply depends on (1-t+1)rt
• some behaviors depend on future public
policies
Terrorism “game”
• two actors: government and (potential)
terrorist
• government values its citizen’s lives at at
least $100,000 each
• for $10,000,000, the terrorist is willing to
risk his life and others. he will not die alone
• will the terrorist take 100 hostages? or not?
0
 
0
= terrorist payoff
= government payoff
  10,000,000 


  10,000,000 
terrorist
government
this government has “discretion”.
ie, has a choice to make
  10,000,000 


  10,000,000  
0
 
0
= terrorist payoff
= government payoff
  10,000,000 


  10,000,000 
terrorist
government
  10,000,000 


  10,000,000  
0
 
0
= terrorist payoff
= government payoff
  10,000,000 


  10,000,000 
terrorist
government
Discretionary Outcome =
“Equilibrium of the Discretion Game”
  10,000,000 


  10,000,000 
terrorist
government
0
 
0
terrorist
government avoids terrorism and
is bettor off when unable, or unwilling,
to make the “right” choice!
government
this government has no
“discretion”. It cannot, or will
not, take action based on value of
life calculation
  10,000,000 


  10,000,000  
0
 
0
terrorist
No Discretion Outcome =
“Equilibrium of the No Discretion Game”
Examples
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capital/wealth levy
amnesties for taxes, draft, immigration
retroactive income tax
patents; restrict pharmaceuticals prices
flood victims
debt repudiation (eg., inflation)
punishing criminals
rent control