Two players simultaneously decide whether or not to acquire new weapons in an arms race game. Each player's type determines his propensity to arm. Types are private information, and are independently drawn from a continuous distribution. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to acquire new weapons if he thinks the opponent will). There is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons. We find conditions under which the unique Bayesian-Nash equilibrium involves an arms race with probability one. However, if the probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the "cheap-talk extension" of the game where the probability of an arms race is close to zero. Copyright The Review of Economic Studies Limited, 2004.
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Balinga, Sandeep & Sjostrom, Tomas, 2001.
"Arms Races and Negotiations,"
Working Papers
3-01-2, Pennsylvania State University, Department of Economics.
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Sandeep Baliga & Stephen Morris, 2000.
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Robert J. Aumann & Sergiu Hart, 2002.
"Long Cheap Talk,"
Discussion Paper Series
dp284, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem, revised Nov 2002.
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Robert J. Aumann & Sergiu Hart, 2003.
"Long Cheap Talk,"
Econometrica,
Econometric Society, vol. 71(6), pages 1619-1660, November.
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Helmut Bester & Karl Wärneryd, 2006.
"Conflict and the Social Contract,"
Discussion Papers
94, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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