The Korean Economic Review
Bargaining and War: A Review of Some Formal Models
Sandeep Baliga (Northwestern University) and Tomas Sostrom (Rutgers University)Year 2013Vol. 29No. 2
Would perfectly rational agents always negotiate peaceful outcomes at the bargaining table, or would they sometimes fight costly wars? The Coase theorem suggests that when rational agents negotiate freely, they will reach a surplus-maximizing outcome. This seems to rule out war, since war will not in general be surplus-maximizing. However, the Coase theorem is valid only under certain assumptions, such as transferable utility (no restrictions on side-payments) and complete information. Brito and Intriligator (1985) showed how incomplete information may lead to war. An aggressor who demands concessions may simply be bluffing, so it may be rational to refuse his demands. If the aggressor is not bluffing, a war may ensue. We discuss how long such a war may last, and whether other kinds of “frictions” (such as limited commitment power and limits on side-payments) may also lead to war.