Paan Jindapon

Higher-order generalizations of Arrow-Pratt and Ross risk aversion: A comparative statics approach

Abstract We analyze comparative risk aversion in a new way, through a comparative statics problem in which, for a cost, agents can shift from an initial probability distribution toward a preferred distribution. The Ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary, and the Arrow–Pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean-preserving spread and the cost is a utility cost. Higher-order increases in risk lead to higher-order generalizations, and the comparative statics method yields a unified approach to the problem of comparative risk attitudes.

Network Externalities and the Structure of Terror Networks

The authors analyze the optimal network structure of two types of terrorist organizations. In the centralized network, the leadership selects the level of individual effort and the level of group connectivity so as to maximize the expected net welfare of the organization’s membership. Leaders in loosely connected networks will also seek to balance the trade-off between security and communications. However, with decentralized decision making, the individual nodes may not make optimal decisions from the group’s perspective. As a consequence, the decentralized decision-making process is suboptimal from the overall perspective of the network. In particular, the leadership in a centralized network is able to coordinate the activities of all network members and to take advantage of important network externalities.

On the Economics of Interrogation: the big 4 Versus the Little Fish Game

While military protocol requires that POWs provide only name, rank, serial number, and date of birth (the so-called Big 4), it is naive to think that all detainees, including terrorists, behave in this fashion. Instead, there is evidence that detainees partially cooperate with their captors by revealing a limited amount of valuable information during the interrogation process. Such a strategy makes it appear that the detainee is cooperative and, since interrogations can be costly, serves as a disincentive for further interrogation. In order to capture the essential differences between the two strategies, we model two different types of games between the interrogator and the detainee. Specifically, we compare the Big 4 game to a two-stage game (the Little Fish game) in which the detainee is permitted to reveal low-level information to the interrogator. We formalize both games, derive the optimal rules for each player, and show that the Big 4 game may not be optimal for either player or for the overall well‐being of the interrogating nation. As such, the Little Fish game can Pareto‐dominate the Big 4 game. Hence, it is possible that the al-Qaeda strategy of partial cooperation is superior to that used by most standing armies. We also show that the level of intensity selected by the interrogator must be balanced by such factors as the moral values of the society and recruiting potential of the terrorists versus the likelihood of obtaining important information.