DP5075 A Theory of Brinkmanship, Conflicts, and Commitments

Author(s): Michael Schwarz , Konstantin Sonin

Publication Date: May 2005

Keyword(s): brinkmanship , commitments , conflicts , war and peace

JEL(s): C78 , D74

Programme Areas: Institutions and Economic Performance

Link to this Page: www.cepr.org/pubs/dps/DP5075.asp

Many conflicts and negotiations can be viewed as a dynamic game, where parties have no commitment power. In our model, a potential aggressor demands concessions from the weaker party by threatening a war. The absence of commitment makes a continuous stream of transfers a more effective appeasement strategy than a lump sum transfer. Based on such a strategy, it is possible to construct a self-enforcing peace agreement between risk-neutral parties, even if transfers shift the balance of power. When parties are risk-averse, a self-enforcing peace agreement may not be feasible. The bargaining power of the potential aggressor increases dramatically if she is able to make probabilistic threats, e.g. by taking an observable action that leads to war with positive probability. This ‘brinkmanship strategy’ allows a blackmailer to extract a positive stream of payments from the victim even if carrying out the threat is harmful to both parties. Our results are applicable to environments ranging from diplomacy to negotiations within or among firms, and are aimed to bring together ‘parallel’ investigations in the nature of commitment in economics and political science.