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NBER Working Papers and Publications
|December 2016||Commitment vs. Flexibility with Costly Verification|
with Pierre Yared: w22936
We introduce costly verification into a general delegation framework. A principal faces an agent who is better informed about the efficient action but biased towards higher actions. An audit verifies the agent’s information, but is costly. The principal chooses a permissible action set as a function of the audit decision and result. We show that if the audit cost is small enough, a threshold with an escape clause (TEC) is optimal: the agent can select any action up to a threshold, or request audit and the efficient action if the threshold is sufficiently binding. For higher audit costs, the principal may instead prefer auditing only intermediate actions. However, if the principal cannot commit to inefficient allocations following the audit decision and result, TEC is always optimal. Our re...
|August 2015||Fiscal Rules and Discretion in a World Economy|
with Pierre Yared: w21492
Governments are present-biased toward spending. Fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks. We compare coordinated rules – chosen jointly by a group of countries – to uncoordinated rules. If governments' present bias is small, coordinated rules are tighter than uncoordinated rules: individual countries do not internalize the redistributive effect of interest rates. However, if the bias is large, coordinated rules are slacker: countries do not internalize the disciplining effect of interest rates. Surplus limits enhance welfare, and increased savings by some countries or outside economies can hurt the rest.
|November 2012||Fiscal Rules and Discretion under Persistent Shocks|
with Pierre Yared: w18545
This paper studies the optimal level of discretion in policymaking. We consider a fiscal policy model where the government has time-inconsistent preferences with a present-bias towards public spending. The government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending. We analyze the optimal fiscal rule when the shocks are persistent. Unlike under i.i.d. shocks, we show that the ex-ante optimal rule is not sequentially optimal, as it provides dynamic incentives. The ex-ante optimal rule exhibits history dependence, with high shocks leading to an erosion of future fiscal discipline compared to low shocks, which lead to the reinstatement of discipline. The implied policy...
Published: Fiscal Rules and Discretion Under Persistent Shocks Marina Halac1,2 andPierre Yared1,3,† Article first published online: 3 OCT 2014 DOI: 10.3982/ECTA11207 © 2014 The Econometric Society Issue Econometrica Econometrica Volume 82, Issue 5, pages 1557–1614, September 2014 citation courtesy of