Sandeep Baliga (Kellogg School of Management)

We study whether the Coase conjecture holds in a model of bargaining during conflict due to Powell [2004] and Fearon [2-13]. Player A makes repeated others to player B. The game ends when either player B accepts an other or some player collapses. Player B may be a strong or a weak type, with a greater probability of collapse in any period if he is weak. Player B’s true type is his private information. Player A may also collapse in any period, but his probability of collapse is common knowledge. If the prior probability that player B is weak is large enough, then in any Nash  equilibrium there is an upper bound on the probability that an other is accepted by the strong type at a given time. As the interval between others goes to zero, this upper bound approaches a limiting value which is strictly less than one.
Thus, inefficient wars are possible even though the two sides engage in frictionless negotiations. In this sense, the Coase conjecture does not hold. We also study the impact of third party intervention to help player B.