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Fifty-four Forty or Fight

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C:\HERSCHEL\WORK\Fifty-four.DVI April 2003 “Fifty-four Forty or Fight!” Herschel I. Grossman Brown University Abstract This paper develops an explanation for historical differences in the ways in which ter- ritorial 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. JEL classification number: D74 Keywords: Territorial Dispute, Fortified Border, Peaceful Settlement, Armed Conflict I have received helpful comments from Michelle Garfinkel, Dmitriy Gershenson, Francisco Gonza´lez, Simon Grant, Luis Locay, Donald Paterson, and Enrico Spolaore and from other participants in seminars at Texas A&M University, at Rice University/University of Houston, at the International Center for Economic Re- search/University of Turin, at the University of Bologna, and at the University of British Columbia. I thank Harl Ryder for technical assistance. The Democratic candidate, James Polk, won the American presidential election of 1844 on a platform that asserted the American claim to the entire Oregon

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