The Inefficient Use of Power: Costly Conflict with Complete Information

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Abstract
Recent work across a wide range of issues in political economy as well as in American, comparative, and international politics tries to explain the inefficient use of power—revolutions, civil wars, high levels of public debt, international conflict, and costly policy insulation—in terms of commitment problems. This paper shows that a common mechanism is at work in a number of these diverse studies. This common mechanism provides a more general formulation of a type of commitment problem that can arise in many different substantive settings. The present analysis then formalizes this mechanism as an “inefficiency condition” that ensures that all of the equilibria of a stochastic game are inefficient. This condition has a natural substantive interpretation: Large, rapid changes in the actors' relative power (measured in terms of their minmax payoffs) may cause inefficiency.