1. Rules vs. Discretion

2. Motivation: capital supply vs labor supply t labor supply depends on (1-  t )w t t capital supply depends on (1-  t+1 )r t some behaviors depend on future public policies

3. 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?

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

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

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

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

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

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

10. 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