Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 264: Conflict Resolution Under Asymmetric Information

Helmut Bester and Karl Wärneryd ()
Additional contact information
Helmut Bester: Department of Economics, Free University of Berlin, Postal: Boltzmannstr. 20, D-14195 Berlin, Germany
Karl Wärneryd: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: We consider Bayesian incentive compatible and individually rational mechanisms for resolving conflicts between two agents who are uncertain about each other's fighting potential. We model the default option of outright conflict as a probabilistic contest. Examples of such contests may be international conflict, litigation, and elections. We show, in particular, that if the loss of surplus from outright conflict is small enough, then any mechanism must assign a positive probability of conflict. This happens even though only a peaceful agreement avoids a loss of resources.

Keywords: Conflict; asymmetric information; mechanism design; contests.

JEL-codes: C78; D72; D74; D82; H21; H23

26 pages, September 30, 1998

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