To Deter or to Moderate? Alliance Formation in Contests with Incomplete Information
38 Pages Posted: 12 Jan 2016
Date Written: December 22, 2015
We consider two players' choice about the formation of an alliance ahead of conflict in a framework with incomplete information about the strength of co-players. When deciding on alliance formation, players anticipate the self-selection of other players and the informational value of own and other players' choices. In the absence of these signaling effects, strong players have an incentive to stand alone, which leads to a separating equilibrium. This separating equilibrium can be destabilized by deception incentives if beliefs are updated on the basis of endogenous alliance formation choices. Weak players may find it attractive to appear strong in order to deter competitors from positive effort choices. Strong players may find it attractive to appear weak in order to give their competitors a false sense of security and then beat them with little effort. Moreover, appearing weak allows players to free-ride when alliances are formed.
Keywords: alliance; incomplete information; endogenous formation; all-pay
JEL Classification: D72, D74
Suggested Citation: Suggested Citation