Is a Long War Desirable? Optimal Debt Concessions in Attrition Warfare

Abstract

Wars of attrition are often characterized by negotiations and concessions occurring in conflicts, such as peace attempts or ceasefires. The present paper introduces a round of concessions into standard war of attrition models and focuses on a debt stabilization game. Concessions granted by each player in the pre-stabilization period are modeled as an agreement to pay additional taxes with the aim of reducing government deficits and public debt. We compute the symmetric Bayesian-Nash equilibrium and show that concessions prolong the attrition warfare rather than quickly generating a peace period. Thus, concession forms a strategic variable for every player to control and delay the end of the war. Furthermore, we establish that the war-ending outcome, namely debt stabilization, is more delayed under a coalition government than under a single-party government. Finally, this paper contributes to explain failures of austerity measures in public debt stabilization.

Overconfidence and conflict

“…These contributions highlight the existence of a continuum of equilibria where uniqueness is achieved by specifying a dominant strategy when players do not surrender, and consider that the payoff the players receive at the end of the war of attrition does not depend on its duration. For example, regarding wars of attrition in macroeconomic contexts, Alesina and Drazen (1991), Martinelli and Escorza (2007), or Menuet (2020) assume a constant cost of defeat, which depends on an (exogenous) political polarization parameter. In the industrial organization literature, some works (see, e.g., Bulow & Kemperer 1999; Krishna & Morgan, 1997, among others) analyze all‐pay auction games, and assume an individual constant “prize” that each player gets at the end of the war of attrition.…”