Many conflicts and negotiations can be viewed as dynamic games in which parties have no commitment power. In our model, a potential aggressor demands concessions from a weaker party by threatening war. The absence of commitment makes a continuous stream of transfers a more effective appeasement strategy than a lump-sum transfer. As long as both sides have constant marginal utility of consumption, it is possible to construct a self-enforcing peace agreement even if transfers shift the balance of power. When marginal utility of consumption is decreasing, a self-enforcing peace agreement may not be feasible. The bargaining power of the potential aggressor increases dramatically if she is able to make probabilistic threats, for example, by taking an observable action that leads to war with a positive probability. This “brinkmanship strategy” allows a blackmailer to extract a positive stream of payments from the victim, even if carrying out the threat is harmful to both parties. Our results are applicable to environments ranging from diplomacy to negotiations within or among firms and are aimed to bring together “parallel” investigations in the nature of commitment in economics and political science.
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