The Wrong Kind of Information

TL;DR

This paper analyzes how agents with biases choose projects based on verifiable and unverifiable information, highlighting the complex effects on overall efficiency and the role of legal judgments.

Contribution

It introduces a model examining the impact of verifiable versus unverifiable information on agent decision-making and project efficiency under legal scrutiny.

Findings

Improving unverifiable information always enhances efficiency.

Enhancing verifiable information can sometimes reduce overall efficiency.

Biases influence agents' project choices and legal outcomes.

Abstract

Agents, some with a bias, decide between undertaking a risky project and a safe alternative based on information about the project's efficiency. Only a part of that information is verifiable. Unbiased agents want to undertake only efficient projects, while biased agents want to undertake any project. If the project causes harm, a court examines the verifiable information, forms a belief about the agent's type, and decides the punishment. Tension arises between deterring inefficient projects and a chilling effect on using the unverifiable information. Improving the unverifiable information always increases overall efficiency, but improving the verifiable information may reduce efficiency.