Bargaining and Conflict with Up-Front Investments: How Power Asymmetries Matter

36 Pages Posted: 23 Jan 2020

See all articles by Zachary Schaller

Zachary Schaller

University of California, Irvine - Department of Economics

Stergios Skaperdas

University of California - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2019

Abstract

We examine settings - such as litigation, labor relations, or arming and war - in which players first make non-contractible up-front investments to improve their bargaining position and gain advantage for possible future conflict. Bargaining is efficient ex post, but we show that a player may prefer Conflict ex ante if there are sufficient asymmetries in strength. There are two sources of this finding. First, up-front investments are more dissimilar between players under Conflict, and they are lower than under Bargaining when one player is much stronger than the other. Second, the probability of the stronger player winning in Conflict is higher than the share received under Nash bargaining. We thus provide a rationale for conflict to occur under complete information that does not depend on long-term commitment problems. Greater balance in institutional support for different sides is more likely to maintain peace and settlements.

Keywords: power asymmetries, war, litigation, contests

JEL Classification: C700, D740, J530, K410

Suggested Citation

Schaller, Zachary and Skaperdas, Stergios, Bargaining and Conflict with Up-Front Investments: How Power Asymmetries Matter (2019). CESifo Working Paper No. 8030, Available at SSRN: https://ssrn.com/abstract=3523534 or http://dx.doi.org/10.2139/ssrn.3523534

Zachary Schaller (Contact Author)

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

Stergios Skaperdas

University of California - Department of Economics ( email )

3123 Social Science Plaza A
Irvine, CA 92697-5100
United States
714-824-4167 (Phone)
714-824-2182 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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