Suppose there are players and each has private information about how tough they are.  The two toughness parameters together determine the probability of winning should there be a war.  If the parameters are common knowledge, it is possible to avoid war by making a transfer that makes war pointless.  By making a transfer, the target has less resources to capture and the challenger has more to lose and an appropriate transfer can create the right balance to avoid war.  But if there is incomplete information, a player might start  a war.

Is it possible to set up transfers to completely prevent inefficient war?  Myerson and Satterthwaite asked this question in a classical model of trade with incomplete information.  We can use similar techniques to answer a similar question in a conflict scenario.  In other words, we can use the revelation principle and ask whether it is possible to design transfers as a function of reports to guarantee peace in all circumstances.  Players’ types – their toughness parameters – directly affect their payoffs only if there is war.  Since there is no war in equilibrium, it is impossible to separate out different types and transfers must be constant as a function of reports.  The constant payoff each player then receives must be enough to dissuade his toughest type from starting a war.  If this is impossible to guarantee for both players’ toughest types simultaneously, there must be war.  Here are the slides.