The policy that is optimal to announce is not optimal to carry out, so discretion without commitment produces worse outcomes than rules.
Kydland and Prescott's 1977 result, which won the 2004 Nobel. It is the formal argument behind central bank independence and behind Elster's Ulysses contracts.
In practice
- A university that says extensions will not be granted grants them in week eleven, and next year's cohort plans on that.
- A government that promises never to bail out a failing bank has an incentive to break the promise on the day it matters, which is why the promise is not believed.
- Standing
- The formal result behind central bank independence and Elster's Ulysses contracts.
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys