Question

For most of the Cold War, Finland conducted a policy of “self-restraint” regarding the Soviet Union, meaning it did not adopt any foreign policies that it thought the Soviet Union would not like. Say Finland’s ideal point for Soviet control over its autonomy was zero (i.e. no Soviet control) and the Soviet Union’s ideal point for its control over Finland was one (i.e. complete control). Finland’s utility is U_F = 1-x and the Soviet Union’s utility is U_S = x. If there is a war, the winner sets the policy at its ideal point.

b) What is Finland’s expected utility of war? What is the Soviet Union’s expected utility of war? What is the bargaining range?   How does this example help you understand Finland’s “self-restraint?”

Answer 1

From the previous part (answered separately), we find that:

Finalnd's resources, F =1

Soviet Union's resources, S=9

Finland's probability of winning war

Soviet Union's probability of winning war

i.e. Finland's probabilty of winning is 0.1 and Soviet Union's probability of winning is 0.9

Finland’s utility is U_F = 1-x

Soviet Union’s utility is U_S = x

If there is a war, the winner sets the policy at its ideal point. Assume cost of war is 0.

Finland’s expected utility of war = 0.1*1 + 0.9*0 = 0.1
To avoid war. Finland has to receive utility . This happens when which is the range of bargains Finland is willing to accept.

Soviet Union’s expected utility of war = 0.9*1 + 0.1*0 = 0.9.

To avoid war. Soviet Union has to receive utility

i.e. the range of bargains Soviet Union is willing to accept is

The intersection of the range of bargains either country is willing to accept gives the bargaining range. Here, the intersection is at a single point i.e. x = 0.9.

i.e. the bargaining range is a single point x = 0.9

This example explains Finland’s “self-restraint” as due to its lack of resources, it preferred to avoid war so much that it was ready to forsake its autonomy to such a large extent (0.9!).