The microfoundations of rules vs. discretion

Using anN-person model, I explore the microfoundations of benevolent rules-dominant situations (of which the familiar time inconsistency models are examples). I show that under discretion the citizens confront a prisoner's dilemma, and I discuss the similar dilemmas embedded in the time inconsistency models. I then suggest new solutions to benevolent rules dominance: suboptimality can be avoided by accepting the discretionary regime and applying to the citizen population the standard remedies to the prisoner's dilemma. I received valuable comments from C. de Bartolome, T. Cowen, S. Fischer, B. Hillier, A. Irigoin, R. Kroszner, B. O'Flaherty, J. Ordover, H. Polemarchakis, R. Radner, A. Schotter, L. Svensson, L.H. White, three anonymous referees, and the participants of a summer luncheon at the Public Choice Center, George Mason University.