Rules vs. Discretion

1. Rules vs. Discretion

2. 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?

3. don’t take hostages pay the ransom take hostages try killing the terrorist = terrorist payoff = government payoff terrorist this government has “discretion”. ie, has a choice to make government

4. don’t take hostages pay the ransom take hostages try killing the terrorist = terrorist payoff = government payoff terrorist government

5. don’t take hostages pay the ransom take hostages = terrorist payoff = government payoff terrorist government

6. pay the ransom take hostages Discretionary Outcome = “Equilibrium of the Discretion Game” terrorist government

7. don’t take hostages take hostages try killing the terrorist government avoids terrorism and is bettor off when unable, or unwilling, to make the “right” choice! terrorist this government has no “discretion”. It cannot, or will not, take action based on value of life calculation government

8. don’t take hostages terrorist No Discretion Outcome = “Equilibrium of the No Discretion Game”

9. Examples • 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