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The formation of an alliance in conflict situations is known to suffer from a collective action problem and from the potential of internal conflict. We show that budget constraints of an intermediate size can overcome this strong disadvantage and explain the formation of alliances.


NOTICE: this is the author’s version of a work that was accepted for publication in Economics Letters. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Economics Letters, volume 103, issue 2, in 2009. DOI: 10.1016/j.econlet.2009.01.030

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