Working Paper, Brown University, Department of Economics 2003-10
This paper develops an explanation for historical differences in the ways in which territorial disputes between sovereign states have been resolved. The main innovation in the analysis is to allow for three possible equilibria: • an unfortified border; • a fortified but peaceful border; and • armed conflict. The analysis shows that the possibility of a credible agreement to divide a contested territory and to leave the resulting border unfortified depends on the effectiveness of spending on arms by one state relative to another and on the importance that states attach to the potential costs of future armed conflicts. The analysis also shows that, if all relevant parameters are common knowledge, then, even if an agreement to have an unfortified border would not be credible, states can resolve a territorial dispute peacefully by dividing the contested territory and fortifying the border. Finally, the paper points out that unverifiable innovations, especially innovations in military technology, can cause a peaceful settlement to break down, resulting in an armed conflict that in turn can provide the basis for a new peaceful settlement.