Optimal Discretion in the Application of Rules

Discretion is examined as a feature of the design of rule-guided systems. That is, given that rules have to be administered by some group of persons, called adjudicators, and given that their goals may be different from society’s (or a relevant organization’s), when is it socially desirable to allocate discretionary authority to the adjudicators and, if so, to what extent? The answer reflects a tradeoff between the informational advantage of discretion -that adjudicators can act on information not included in rules -and the disadvantage of discretion -that decisions may deviate from the desirable because adjudicators’ objectives are different from society’s. The control of discretion through limitation of its scope, through decision-based payments to adjudicators, and through the appeals process, is also considered. ∗ I wish to thank Lucian Bebchuk, Andrew Daughety, Louis Kaplow, Eric Rasmusen, Jennifer Reinganum, and Kathryn Spier for comments, and the John M. Olin Center for Law, Economics, and Business at Harvard Law School for research support. Optimal Discretion in the Application of Rules Steven Shavell © 2005 Steven Shavell. All rights reserved.