Can money buy peace? Efficiency of side-payments to avoid costly conflicts

Abstract

On the basis of a simple two-player bargaining game model, we investigate whether a side-payment strategy can be used to avoid costly conflicts caused by informational barriers. Assuming that utility is transferable with zero transaction cost, we demonstrate that a side-payment not only provides the incentives to play a peaceful strategy but also contributes to overcoming informational barriers as credible signals. In addition, we show that when actions are strategic complements, a dovish player pays a larger side-payment while a hawkish pays a higher side-payment if actions are strategic substitutes. When negotiating parties are homogeneous with actions being either strategic complements or substitutes for both players, it is more likely that informational barriers can be removed with a higher probability of peace equilibrium. When players are asymmetric with one player's actions being strategic complements while the other player's being strategic substitutes, informational barriers might not be removed with higher chances of costly conflicts.