Coming Soon: Strategic Ambiguity, Moral Hazard, and the Optimal Deterrence Strategy

Abstract

Over the last 50 years, the US has given security promises to many nations while maintaining strategic ambiguity, notably towards Taiwan. This approach involves deciding on protection against other rival pwoers, like China. Neutrality can lead to aggression, but clear protection might cause moral hazard, such as reduced defense efforts by the smaller nation. Our model shows that strategic ambiguity, defined as Knightian uncertainty, deters aggression and prevents moral hazard. We also demonstrate that when the rival nation matches the great power’s strength, the latter fully commits to defending the smaller nation, preventing allegiance shifts. This explains the US’s move from ambiguity to clarity.