We study a simple mechanism design problem that describes the optimal behavior of a country targeted by a foreign terrorist group. The country is uncertain about the terrorists' strength and may decide to acquire such information from the community hosting the terrorists. We highlight a novel trade-off between target hardening -i.e., mitigating the incidence of an attack by strengthening internal controls and improving citizens' protection -and preemptive military measures aimed at eradicating the problem at its root -i.e., a strike in the terrorists' hosting country. We show that, conditional on being informed about the terrorists' strength, the country engages in a preemptive attack only when it faces a sufficiently serious threat and when the community norms favoring terrorists are weak. Yet, in contrast with the existing literature, we show that it is optimal for the country to acquire information only when these norms are strong enough and when its prior information about the terrorists' strength is sufficiently poor.
A decision maker solicits information from two partially informed experts and then makes a choice under uncertainty. The experts can be either moderately or extremely biased relative to the decision maker, which is their private information. I investigate the incentives of the experts to share their private information with the decision maker and analyze the resulting effects on information transmission. I show that it may be optimal to consult a single expert rather than two experts if the decision maker is sufficiently concerned about taking advice from extremely biased experts. In contrast to what may be expected, this result suggests that getting a second opinion may not always be helpful for decision making.
A manufacturer relies on an exclusive subcontractor for production and competes horizontally against an integrated rival that produces in‐house. The exclusive agent is privately informed about the marginal cost of production. When marginal costs are correlated across companies, information sharing benefits both companies due to reduced uncertainty, but it affects the contracting terms within the vertical hierarchy and creates horizontal externalities between companies. We show that the manufacturer who suffers from agency cost benefits more from sharing information than his rival performing in‐house production only when costs are highly correlated, and in this case, information sharing may actually benefit consumers.
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