Blainey (1988) popularized the argument that crises are more likely to end in war when two nations disagree about their relative bargaining power. This is known as the 'mutual optimism' cause of war. Fey and Ramsay (2007) claim that this explanation is not logically coherent. They prove for a general class of models that war cannot occur with positive probability in equilibrium because of mutual optimism. We show that their environment relies on two assumptions that are substantively implausible. If we relax either assumption, war occurs with positive probability in equilibrium when there is sufficient optimism. We also argue that any substantively compelling model of crisis bargaining, by definition, cannot belong to the class studied by Fey and Ramsay (2007). Consequently, while their result is mathematically correct, it cannot tell us much about crisis bargaining in general and mutual optimism in particular.

According to a leading rationalist explanation, war can break out when a large rapid shift of power renders unbelievable a rising state's promise to compensate its declining opponent, causing the latter to attack preventively. This mechanism does not provide a complete and coherent explanation of war because it does not specify how inefficient fighting resolves this commitment problem. We present a complete information model of war as a sequence of battles and show that although opportunities for a negotiated settlement arise throughout, the very desirability of peace creates a commitment problem that undermines its likelihood. Because players have incentives to settle as soon as possible, they cannot credibly threaten to fight long enough if an opponent launches a surprise attack. This decreases the expected duration and costs of war and causes mutual deterrence to fail. Fighting's sheer destruction improves the credibility of these threats by decreasing the benefits from continuing the war. Equilibrium fighting may involve escalating costs that exceed the value of the stakes by the time peace is negotiated and that leave both players worse off than when the war began.

In typical crisis bargaining models, strong actors must convince the opponent that they are not bluffing and the only way to do so is through costly signaling. However, in a war strong actors can benefit from tactical surprise when their opponent mistakenly believes that they are weak. This creates contradictory incentives during the pre-war crisis: actors want to persuade the opponent of their strength to gain a better deal but, should war break out, they would rather have the opponent believe they are weak. I present an ultimatum crisis bargaining model that incorporates this dilemma and show that a strong actor may feign weakness during the bargaining phase. This implies that (a) absence of a costly signal is not an unambiguous revelation of weakness,(b) the problem of uncertainty is worse because the only actor with incentives to overcome it may be unwilling to do so, and (c) because of the difficulty with concealing resolve, democracies might be seriously disadvantaged in a crisis.

If war results from disagreement about relative strength, then it ends when opponents learn enough about each other. Learning occurs when information is revealed by strategically manipulable negotiation behavior and non-manipulable battlefield outcomes. I present a model of simultaneous bargaining and fighting where both players can make offers and asymmetric information exists about the distribution of power. In the Markov perfect sequential equilibrium, making and rejecting offers has informational value that outweighs the one provided by the battlefield. However, states use both sources of information to learn and settle before military victory. The Principle of Convergence posits that warfare ceases to be useful when it loses its informational content, and that belief in defeat (victory) is not necessary to terminate (initiate) hostilities. Thus, the standard puzzle in international relations that seeks to account for prewar optimism on both sides may not be that relevant.

Domestic audience costs can help leaders establish credible commitments by tying their hands. Most studies assume these costs without explaining how they arise. I link domestic audience costs to the citizens' ability to sanction the leadership for pursuing a policy they would not want if they had the same information about its quality. How can citizens learn about policy quality? I model two information transmission mechanisms: one potentially contaminated by politically motivated strategic behavior (leader and opposition), and another that is noisy and possibly biased (media). In equilibrium, audience costs can arise from strategic sources only in mixed regimes under relatively restrictive conditions, and cannot arise in autocracies or democracies. However, in democratic polities the media can play a mitigating role and does enable leaders to generate audience costs. Still, their ability to do so depends on the institutional protections guaranteeing freedom of the media from political manipulation. Domestic audience costs are not necessarily linear in regime type, as often assumed in applied research.