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Two players choose hawkish or dovish actions in a conflict game with incomplete information. An "extremist," who can either be a hawk or a dove, attempts to manipulate decision making. If actions are strategic complements, a hawkish extremist increases the likelihood of conflict, and reduces welfare, by sending a public message which triggers hawkish behavior from both players. If actions are strategic substitutes, a dovish extremist instead sends a public message which causes one player to become more dovish and the other more hawkish. A hawkish (dovish) extremist is unable to manipulate decision making if actions are strategic substitutes (complements). (JEL D74, D82)

Stag hunt and chicken games are canonical representations of two kinds of strategic interactions. In stag hunt, aggression feeds on itself, and mutual fear escalates into conflict. Chicken is a model of preemption and deterrence. With complete information, these games have multiple Nash equilbria. Using standard arguments from the Industrial Organization literature, we find sufficient conditions under which payoff uncertainty generates a unique equilibrium. These conditions encompass information structures ranging from independent types (as in our previous work) to highly correlated types (as in global games).

Two decision-makers choose hawkish or dovish actions in a conflict game with incomplete information. The decision-making can be manipulated by extremists who send publicly observed cheap-talk messages. The power of extremists depends on the nature of the underlying conflict game. If actions are strategic complements, a hawkish extremist can increase the likelihood of conflict by sending messages which trigger a fear-spiral of hawkish actions. This reduces the welfare of both decision-makers. If actions are strategic substitutes, a dovish extremist (pacifist) can send messages which cause one decision-maker to back down and become more dovish. This reduces his welfare but benefits the other decision-maker. The hawkish extremist is unable to manipulate the decision-makers if actions are strategic substitutes, and the pacifist is equally powerless if actions are strategic complements.

We offer a theory of polarization as an optimal response to ambiguity. Suppose individual A's beliefs first-order stochastically dominate individual B's. They observe a common signal. They exhibit polarization if A's posterior dominates her prior and B's prior dominates her posterior. Given agreement on conditional signal likelihoods, we show that polarization is impossible under Bayesian updating or after observing extreme signals. However, we also show that polarization can arise after intermediate signals as ambiguity averse individuals implement their optimal prediction strategies. We explore when this polarization will occur and the logic underlying it. (JEL D81, D82, D83)

We build a game-theoretic model where aggression can be triggered by domestic political concerns as well as the fear of being attacked. In the model, leaders of full and limited democracies risk losing power if they do not stand up to threats from abroad. In addition, the leader of a fully democratic country loses the support of the median voter if he attacks a non-hostile country. The result is a non-monotonic relationship between democracy and peace. Using the Polity IV dataset, we classify countries as full democracies, limited democracies, and dictatorships. For the period 1816-200, Correlates of War data suggest that limited democracies are more aggressive than other regime types, including dictatorships, and not only during periods when the political regime is changing. In particular, a dyad of limited democracies is more likely to be involved in a militarized dispute than any other dyad (including mixed dyads, where the two countries have different regime types). Thus, while full democratization might advance the cause of peace, limited democratization might advance the cause of war. We also find that as the environment becomes more hostile, fully democratic countries become more aggressive faster than other regime types.

Psychological and experimental evidence, as well as a wealth of anecdotal examples, suggests that firms may confound fixed, sunk, and variable costs, leading to distorted pricing decisions. This article investigates the extent to which market forces and learning eventually eliminate these distortions. We envision firms that experiment with cost methodologies that are consistent with real‐world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk costs to pricing decisions. Firms follow "naive" adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies. Costing and pricing practices that increase profits are reinforced. In some market structures, but not in others, this process of reinforcement causes pricing practices of all firms to systematically depart from standard equilibrium predictions.

Motivated by recent developments in cyberwarfare, we study deterrence in a world where attacks cannot be perfectly attributed to attackers. In the model, each of$$ n $$attackers may attack the defender. The defender observes a noisy signal that probabilistically attributes the attack. The defender may retaliate against one or more attackers and wants to retaliate against the guilty attacker only. We note an endogenous strategic complementarity among the attackers: if one attacker becomes more aggressive, that attacker becomes more "suspect" and the other attackers become less suspect, which leads the other attackers to become more aggressive as well. Despite this complementarity, there is a unique equilibrium. We identify types of improvements in attribution that strengthen deterrence—namely, improving attack detection independently of any effect on the identifiability of the attacker, reducing false alarms, or replacing misidentification with non-detection. However, we show that other improvements in attribution can backfire, weakening deterrence—these include detecting more attacks where the attacker is difficult to identify or pursuing too much certainty in attribution. Deterrence is improved if the defender can commit to a retaliatory strategy in advance, but the defender should not always commit to retaliate more after every signal.