UNSW Business School Working Paper

A challenger wants a resource initially held by a defender, who can negotiate a settlement by offering to share the resource; if this fails, conflict ensues. We propose a dynamic non-cooperative game in which negotiation and conflict influence each other. During conflict each player could be a tough type for whom fighting is costless; therefore non-concession intimidates the opponent into conceding. We derive how the probabilities of being tough, relative discount factors, and the time until conflict all determine the likelihood of conflict and its length. Several policy relevant lessons emerge. An offer made by a defender unaware of his own type fails with some probability if the threat of conflict is imminent, but succeeds for sure if the threat of conflict is distant and the defender is more patient than the challenger. Instead, if the offer is made by a privately informed and more patient defender, negotiation fails completely. Finally, allowing multiple offers is no more effective---a serious offer is made only on the brink of conflict. Conflict can be prolonged even if the probability of the tough type is arbitrarily small.