Credibility may require discretion, not rules

We reexamine the common argument that rules produce greater credibility tha n discretion. Rules limit the actions of agents, restricting observations o f the agents' preferences or types. In a second-best world, where rules can not be everlasting, a regime of discretion in some periods may produce supe rior credibility and dominate a regime of rules. (C) 2000 Elsevier Science S.A. All rights reserved.