In Bartling, Fehr and Schmidt (2012) we show theoretically and experimentally that it is optimal to grant discretion to workers if (i) discretion increases productivity, (ii) workers can be screened by past performance, (iii) some workers reciprocate high wages with high effort and (iv) employers pay high wages leaving rents to their workers. In this paper we show experimentally that the produc...

This paper investigates the economic consequences of a financial institution’s reporting discretion in the context of bank runs. A fundamental-based run imposes market discipline on insolvent institutions, but a panic-based run shuts down institutions that could have survived with better coordination among investors. We augment a bank-run model with the financial institution’s discretion over r...

E conomic models with multiple equilib-ria, such as Diamond and Dybvig (1983), have become increasingly useful in analyzing volatility in financial markets and in business cycles. In many of these models, indeterminacy is a result of incomplete financial markets or technological nonconvexities. Here we identify economic policy discretion to be another distinct cause of indeterminate equilibrium...

Recent writers have invoked the idea that epistemic rationality gives us options in an attempt to show that we can exercise direct doxastic control without irrationality. Speci cally, they suggest that when the evidence for p is su cient but not conclusive, it would be rational either to believe p or to be agnostic on p, and they hold that we can in these cases e ectively decide to form either ...

This paper provides an empirical framework to evaluate regulatory discretion and apply it to California water quality regulation. We identify and estimate an adverse selection model of the regulator-discharger interaction to measure the extent to which the regulator’s environmental preferences and administrative or political costs affect penalties and compliance. We find that if the regulator p...