AbstractIn this paper, we study alternative forms of conflict resolution, both peaceful
and non-peaceful, between two countries that compete for claims to a resource
used to produce potentially traded goods. Consistent with the classical liberal
argument, peace supports mutually beneficial trade, whereas war preempts it. War
always induces countries to allocate resources into non-contractible arming
(“guns”) for superiority in conflict. Under peaceful settlement,
countries might choose to arm as well for gaining leverage in negotiations, but
arming is typically less than what it is under war. Building on the observation
that arming itself affects the countries’ bargaining sets, we compare the
efficiency properties of division rules generated by three prominent bargaining
solutions – namely, splitting the surplus, equal sacrifice, and Nash
bargaining – and show how they depend on the gains from trade.
Rules for Dividing a Disputed Resource in the Context of the Classical Liberal Argument for Peace
