Incentives for Bilateral War : A Polar Case

In this paper I lay down the foundations for what can be called an economic theory of bilateral war, that is, a theory where the interconnections between trade and war for pairs of states are elucidated. In a two-stage game with complete information and endogenous payoffs, it is proved that the propensities of countries to peace or war basically depend on asymmetries in the distribution of demand and in the distribution of resources between them. Analysis of the asymmetrical Nash equilibria reveals that under the assumptions of the model the only possible equilibrium is war