Arms Races and the Outbreak of War: Application of Principal-agent Relationships and Asymmetric Information

Abstract

Some recent developments in principal-agent theory and asymmetric information are used to study, in the context of a formal model, both when and under what circumstances arms races lead to the outbreak of war and whether wars can be explained as the result of rational behaviour and thus subject to analysis by social scientists. In the formal model countries act as rational agents concerned with the economic right to consumption in a two-period model in which conflict, war and redistribution may all occur. The first period is one of a potential arms race, with countries choosing between consumption and investment in arms, while the second period is one of a potential crisis, with the countries bargaining and possibly using the threat of force (‘conflict’) or the use of force (‘war’) to reallocate resources. In certain circumstances arms races do lead to war, while in other well-defined cases they can result in a stable equilibrium in which each side deters the other. Some key factors in distinguishing between these two cases are the level of resources in both countries, the possibilities for redistributing resources, and the possibility that in a situation of asymmetric information the uninformed country will adopt a pooling rather than a separating equilibrium.