Comparing Bargaining Solutions in the Shadow of Conflict: How Norms against Threats Can Have Real Effects

Abstract

In many economic environments agents make costly and irreversible investments (in “guns”) that may enhance their respective threat payoffs but also shrink the utility possibilities set. In such settings, with variable threats and a variable utility possibilities set, it becomes possible to rank different bargaining solutions in terms of efficiency. We compare bargaining solutions within a class in which the influence of the threat point on the bargaining outcome varies across solutions. Under symmetry, we find that the solution in which the threat point is least influential—the equal sacrifice solution—Pareto-dominates the other solutions. Since the equal sacrifice solution puts the least weight on the threat point, norms against threats (that can be seen in many seemingly rhetorical pronouncements in adversarial relations) can mitigate some of the costs of conflict and therefore have efficiency-enhancing effects. Journal of Economic Literature Classification Numbers: C72, C78, D30, D70, D72, K42.