Bargaining and Conflict: The Impact of Unobservable Preparation

Abstract

Most analyses of bargaining focus on the effect of exogenous asymmetric information about the gains from trade. This paper shows that, even with ex ante identical players, the ability to make unobservable preparations affecting the outcome of a conflict generates asymmetric information. This makes the possibility of conflict inevitable, even when it is common knowledge that conflict reduces total welfare and players can bargain to reach a settlement. I characterize the possible equilibria of this infinite-horizon, alternating-offer, bargaining game with two-sided uncertainty and outside options. Finally, I derive comparative statics for the probability of conflict and total welfare.

Keywords: Bargaining, Conflict, Unobservable Preparation

JEL Classification: D00, D74