The Use of Concessions in Forestalling War

We determine whether and how concessions to an aggressive country by its non-aggressive rival can be used to forestall war in a dynamic environment. In every period, the aggressive country can seize some of non-aggressive country's resources by war. Alternatively, it can wait for the non-aggressive country to concede these resources peacefully. With some probability, making concessions is too costly, but this is not observed by the aggressive country. Both countries suffer from limited commitment, and war is the static Nash equilibrium. In a dynamic environment, the realization of war in the future can sustain concessions along the equilibrium path, and the two countries can fluctuate between periods of war and periods of peace. However, if the cost of war to the non-aggressive country is low, the two countries must converge to permanent war. While permanent war minimizes the welfare of the two countries in the long run, it maximizes their welfare along the equilibrium path by providing incentives for concession-making. In contrast, if the cost of war to the non-aggressive country is high, the two countries can avoid permanent war and can fluctuate between periods of war and periods of peace forever.