Information transmission in the shadow of conflict

Abstract

Miscalculations due to lack of information are often seen as one of the main causes of war. Belligerents, though, often have multiple channels to share information and avoid a costly conflict. Yet, for information sharing to be useful, the information shared must be credible. In a fully decentralised setting, with no mediator available, I look at two ways a privately informed party can communicate its resolve to its opponent: sunk cost signals and audience costs. I show that costly signaling simply does not work, the only equilibrium is pooling with no signaling. Audience costs fare much better and can allow for full revelation of a belligerent's private information. This difference results from who pays the cost of transmitting information: the privately informed party with sunk signals, its opponent with audience costs as these costs reduce the value of peace for the belligerent who holds private information.

Keywords: war, signaling, bargaining, avoiding conflicts, audience costs

JEL Classification: D70, D74, D83