Question

Two countries, A and B, have a conflict over a common border. The border can take values from zero to one, inclusive (where x is the percentage of the disputed territory under Country A’s control). The status quo border is normalized to one, which is Country A’s ideal point. Country B’s ideal point for the border is zero. Country A’s utility function is x, and B’s utility function is 1-x, where x is the point at which the border is actually set. If the two countries go to war over the border dispute, the winner will set the border at its ideal point. Assume that the probability that Country A will win the war is 0.35. The costs of war for both countries are 0.1.

1. Who is in the better bargaining position? Why?

Answer 1

Country B has a better bargaining position. Firstly, wherever the border is set after the war will mean a benefit for B since current it is set at 1, which is Country A's ideal point, implying utility of zero for B. Secondly, the probability of A winning the war is 0.35, which means that B's probability of winning the war is 0.65. A combination of these two factors implies that country B is not only set to gain from a reset of the border but is also likely to win the war that could be fought for such a reset.