Communication in the Shadow of Catastrophe

Abstract: We study the role of risk in strategic information transmission. Revisiting the choice between delegation and communication, we find that a uniform scaling of variance has no effect on the optimal choice of authority, and thus is no adequate measure of risk. We then consider the effect of the shape of the distribution, in particular, the weight in the tails. We find that a high risk of extreme events diminishes the quality of information sharing. As a result, delegation of authority becomes relatively more attractive compared to communication in environments with more weight in the tails.