Abstract
Two players simultaneously decide whether or not to acquire new weapons in an arms race game. Each player's type determines his propensity to arm. Types are private information, and are independently drawn from a continuous distribution. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to acquire 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.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 351-369 |
| Number of pages | 19 |
| Journal | Review of Economic Studies |
| Volume | 71 |
| Issue number | 2 |
| DOIs | |
| State | Published - Apr 2004 |
Funding
Acknowledgements. We thank three anonymous referees and the editor, Mark Armstrong, for many valuable comments. We also thank Eric Maskin, Josef Perktold, Ariel Rubinstein and Bill Zame, as well as the participants in many seminars, for their comments. Tomas Sj\u00F6str\u00F6m acknowledges financial support from National Science Foundation grant SES-0111527. Any errors are our responsibility.
ASJC Scopus subject areas
- Economics and Econometrics