How (and When) to Communicate with Enemies

This study considers situations involving two parties with private information and conflicting interests. I want to determine the impact of allowing different types of communication on the welfare of the parties. The following example motivates some of the results and provides intuition for them. Consider the situation of two countries involved in an arms race. Call the countries we (us) and they (them). Assume that we are interested in defeating them and that an attack is certain to lead to victory if we have more weapons than they do. Further assume that the consequences of an unsuccessful attack are bad. Uncertainty about their stock of weapons may have a stabilising influence. If we knew that they were at a strategic disadvantage, then we would attack. If we did not have that information, then we might decide not to risk the attack. Now suppose that both countries are able to disclose verifiably the size of their stock of weapons. In this case, it may be in the interest of countries to reveal the size of their arsenal when their stock is large. Disclosure discourages attacks from opponents who are not strong enough to win a battle. It could therefore reduce the price of victory. If a country discloses information about its arsenal when it is well stocked, however, then failure to reveal information increases the risk that its opponent will attack. In this way, the ability to reveal information verifiably leads to full disclosure. Nevertheless it is dangerous to reveal this information. When there is no uncertainty, someone will attack under almost all circumstances. From an ex ante point of view, both countries are made worse off.