Bargaining in the shadow of conflict: resource division and War’s Inefficiency Puzzle in the commons

This study examines War’s Inefficiency Puzzle in a resource bargaining model, where the nature of the resource (e.g., water or land) can influence resource division valuation. In the model, an embedded resource conflict or contest model equilibrium constitutes the disagreement point. We first show that the Puzzle holds across all winner-take-all conflict forms in a generalized family given a standard bargaining (in the shadow of conflict) framework. When introducing resource division discounts, we find conditions in which a bargaining solution does not exist such that conflict is chosen over settlement. Resource division discounts can cause conflict to be chosen over any settlement point in the feasible set, thus providing a solution to War’s Inefficiency Puzzle. This solution does not assume that a resource cannot be divided. It only assumes that division may lead to division discounts. We then consider a generalization of a classic tragedy of the commons model and find that division of an innate commons leads to division discounts as an equilibrium outcome.