Arms races and negotiations

Sandeep Baliga*, Tomas Sjöström

*Corresponding author for this work

Research output: Contribution to journalArticle

62 Scopus citations

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 languageEnglish (US)
Pages (from-to)351-369
Number of pages19
JournalReview of Economic Studies
Volume71
Issue number2
DOIs
StatePublished - Apr 1 2004

ASJC Scopus subject areas

  • Economics and Econometrics

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