Equilibrium Behavior in Crisis Bargaining Games

Abstract

This paper analyzes a general model of two-player bargaining in the shadow of war, where one player possesses private information concerning the expected benefits of war. I derive conclusions about equilibrium behavior by examining incentive compatibility constraints, where these constraints hold regardless of the game form; hence, the qualitative results are "game-free." I show that the higher the informed player's payoff from war, the higher is his or her equilibrium payoff from settling the dispute short of war, and the higher is the equilibrium probability of war. The latter result rationalizes the monotonicity assumption prevalent in numerous expected utility models of war. I then provide a general result concerning the equilibrium relationship between settlement payoffs and the probability of war.

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