A Dynamic Theory of War and Peace

Abstract

This paper develops a dynamic theory of war and peace. In our framework, an aggressive country can forcibly extract concessions from a non-aggressive country via war. Alternatively, it can avoid war and allow the non-aggressive country to make concessions on its own. Both countries suffer from limited commitment, and under peace, the non-aggressive country may receive a private shock which deems concessions too costly. We show that the realization of war sustains concessions along the equilibrium path. In the efficient sequential equilibrium, the aggressive country punishes failed concessions by requesting larger and larger concessions, and their failure eventually leads to a war which can be temporary. After a temporary war, the aggressive country forgives the non-aggressive country by re-engaging in peace because of the coarseness of public information. In the long run, temporary wars can be sustained only if countries are patient, if the cost of war is large, and if the cost of concessions is low. Otherwise, the aggressive country cannot continue to forgive the non-aggressive country, and countries converge to total war (permanent war).

Keywords: Repeated Games, Asymmetric and Private Information, Contract Theory, International Political Economy, War

JEL Classification: C73, D82, D86, F5, N4