Preventive war and sovereign debt

The preventive motive for war arises because states cannot commit to limit the use of their growing power. This commitment problem can lead to war when there are not enough resources available to compensate the declining state for their expected losses. In this article, we show how capital markets affect preventive war incentives by introducing a profit-maximizing bond market to the canonical bargaining model of war. We find that the nature of the power shift and fundamentals of the market for debt interact to determine when a preventive motive is more likely to lead to war. Two main results show that (1) less probable but more extreme power shifts are most dangerous and (2) unlike the direct effect of interest rates on the cost of war, higher interest on sovereign debt makes war more likely. We present evidence for the latter effect by extending Lemke's (2003) study of preventive war for major-power dyads between 1816 and 1992.