Sinking (Audience) Costs

• In Event: Formal Models of International Conflict

Abstract

Diplomatic crises vary in length. This variation is puzzling given that crisis bargaining models exhibit strong pressures toward take-it-or-leave-it offers. I model diplomatic talks as a war of attrition with two exit options. I show that sunk costs impose a structure on negotiations where the length of crises is a function of states’ underlying levels of resolve. The model predicts that negotiations begin with a ``peaceful" phase during which countries patiently pay sunk costs and wait as the least resolved concede. However, resolved types are impatient, preferring war to sunk costs. This impatience causes negotiations to transition to a ``double screening" phase where diplomacy gradually breaks down as resolved types go to war. Contrary to the conventional wisdom, audience costs are insufficient to “lock” states into conflict. Instead, when sunk costs are low, audience costs lock moderately resolved states into a status quo, where neither state concedes or fights. Using data on the lengths of diplomatic negotiations and their outcomes, I structurally estimate the model and test its performance when compared to an ultimatum bargaining game.

Author

• Noam Reich, Princeton University