Learning it the hard way: Conflicts, economic sanctions and military aids

We study the optimal intervention of a third country in a dispute between an attacker and a defender when there is uncertainty about the attacker’s military strength. The outcome of the dispute is informative about the attacker’s strength and affects its future aggressiveness. The third country has two tools: economic sanctions, that are public, and military aids, that the attacker does not observe. In equilibrium, the third country intervenes in one of three possible ways. It can (i) deter the attacker through a military pact with the defender; (ii) let the attacker conquer the defender’s territory, levying a moderate level of sanctions and providing no military aid; (iii) provide military aids and set a high level of sanctions. Whenever possible, the third country uses either (i) or (ii). By avoiding a militarized conflict, these types of intervention also avoid the increase in the attacker’s aggressiveness that a victory would cause. When the militarized conflict is unavoidable, the third country uses (iii): it sets a level of military aids that decreases the attacker’s probability of winning, while constraining its aggressiveness after a victory. We also show that fostering nationalism (defined as the commitment to fight for one’s independence) is a viable defensive strategy for the defender because it forces the third country to provide military aids.