Arms Races and Negotiations

27 Pages Posted: 24 Oct 2002

Date Written: August 1, 2002

Abstract

We consider an "arms race" game, where two players simultaneously decide whether or not to aquire new weapons. Each player has a type, which is his private information. Types are independent. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to aquire new weapons if he thinks the opponent will). There is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons. We find conditions under which the unique Bayesian Nash equilibrium involves an arms race with probability one. However, if the probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the game where the probability of an arms race is close to zero.

Suggested Citation

Baliga, Sandeep and Sjöström, John Tomas, Arms Races and Negotiations (August 1, 2002). Available at SSRN: https://ssrn.com/abstract=325644 or http://dx.doi.org/10.2139/ssrn.325644

Sandeep Baliga (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-4613 (Phone)
847-467-1220 (Fax)

John Tomas Sjöström

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States