A Theory of Rule Development
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JLEORevision3.pdf
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360.63 KB
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Adobe PDF
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Author(s)
Ellison, Glenn
Holden, Richard
Date Issued
November 2013
Journal
Journal of Law, Economics, and Organization
Publisher
Oxford University Press
Citation
Ellison, G., and R. Holden. “A Theory of Rule Development.” Journal of Law, Economics, and Organization 30, no. 4 (November 25, 2013): 649–682.
Version
Author's final manuscript
Abstract
This article develops a model with endogenously coarse rules. A principal hires an agent to take an action. The principal knows the optimal state-contingent action, but cannot communicate it perfectly due to communication constraints. The principal can use previously realized states as examples to define rules of varying breadth. We analyze how rules are chosen under several assumptions about how rules can be amended. We explore the inefficiencies that arise and how they depend on the ability to refine rules, the principal’s time horizon and patience, and other factors. Our model exhibits path dependence in that the efficacy of rule development depends on the sequence of realizations of the state. We interpret this as providing a foundation for persistent performance differences between similar organizations and explore the role of different delegation structures in ameliorating the effects of bounded communication.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1093/jleo/ewt016
