When Fully Informed States Make Good the Threat of War: Rational Escalation and the Failure of Bargaining

Why would fully informed, rational actors fight over possession of a valued asset when they could negotiate a settlement in peace? Our explanation of the decision to fight highlights the incentives that are present when the defender holds a valued asset coveted by the challenger. The defender receives utility from possession of the contested asset and sees any compromise as a loss that is lower if postponed. The challenger, instead, sees any compromise as a gain that is more valuable if reached earlier. Faced with the defender's vested interest in the status quo, the challenger needs to threaten war and may have no choice but to implement the threat to force a settlement. For the defender, the threat of war is a deterrent that might incite the challenger to back down. In the perfect equilibria that we describe, the players' ability to threaten each other credibly allows them to maintain incompatible bargaining positions instead of helping them narrow their differences. But the very credibility of these threats leads our rivals to engage in what can become lengthy protracted wars.