and Karl Wärneryd
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.
26 pages, September 30, 1998
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