The power to hurt: Costly conflict with completely informed states

Because war is costly and risky, states have incentives to negotiate and avoid conflict. The common rationalist explanation is that war results from private information and incentives to misrepresent it. By modeling warfare as a costly bargaining process, I show that inefficient fighting can occur in equilibrium under complete information and very general assumptions favoring peace. Specifically, I assume that peace can be supported in equilibrium and that fighting brings no benefits to either state, only costs. Although there exist agreements that Pareto-dominate the final settlement, states may prefer to fight. The result turns on the ability of states to impose costs on their opponents and bear costs in return. The existence of a range of acceptable settlements and the threat to revert to particularly disadvantageous ones make inefficient equilibria possible. A diminished ability to hurt the enemy, not simply military victory, is a major reason to stop fighting