Unequal Peace

Abstract

A mediator proposes a settlement between two contestants to avoid a conflict where the cost each contestant bears is inversely related to the contestant's privately known strength. Their strength levels are identically distributed, and their welfares weigh equally in the mediator's objective. However, the optimal proposal offers one contestant much more than it does the other so that the former accepts it always, whereas the latter only occasionally. This unequal treatment improves the prospect of peace by making one contestant willing to settle without fearing that the action signals his weakness that his opponent can exploit should conflict occur.