Which of the following best explains how information asymmetry could lead to bargaining failure and war?

• A. Information asymmetry causes both parties to fully trust each other, reducing the risk of war.
• B. When one party conceals its true capabilities or intentions, the other party may miscalculate and reject peaceful offers, increasing the likelihood of conflict.
• C. Information asymmetry always leads to efficient bargaining outcomes because parties can easily share private information.
• D. Information asymmetry has no impact on bargaining outcomes or the likelihood of war.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of information asymmetry, which occurs when one party in a negotiation or interaction has more or better information than the other party.
2. Step 2: Recognize that in bargaining situations, especially those involving potential conflict or war, each party's decisions depend heavily on their beliefs about the other party's capabilities and intentions.
3. Step 3: Analyze how if one party conceals or misrepresents its true capabilities or intentions, the other party may form incorrect beliefs, leading to miscalculations about the risks and benefits of peaceful agreements.
4. Step 4: Understand that these miscalculations can cause the less-informed party to reject peaceful offers, fearing exploitation or underestimating the opponent's strength, which increases the likelihood of bargaining failure and escalation to war.
5. Step 5: Conclude that information asymmetry can therefore increase the risk of conflict by preventing efficient bargaining outcomes, as trust and accurate information sharing are crucial for peaceful resolution.