Theoretical Economics, Volume 19, Number 1 ( 2024)

Theoretical Economics 19 (2024), 365–405

The dynamics of instability

César Barilla, Duarte Gonçalves


We study a model in which two players with opposing interests try to alter a status quo through instability-generating actions. We show that instability can be used to secure longer-term durable changes, even if it is costly to generate and does not generate short-term gains. In equilibrium, instability generated by a player decreases when the status quo favors them more. Equilibrium always exhibits a region of stable states in which the status quo persists. As players' threat power increases, this region shrinks, ultimately collapsing to a single stable state that is supported via a deterrence mechanism. There is long-run path-dependency and inequity: although instability eventually leads to a stable state, it typically selects the least favorable one for the initially disadvantaged player.

Keywords: Instability, social conflict, stochastic games

JEL classification: C72, C73, C78, D74

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