ABSTRACT
This chapter demonstrates that governments cannot build reputations in models of complete information but may attempt reputation building with incomplete information. It presents a model with incomplete information; derive the appropriate decision rules, then the equilibria. The chapter discusses the sensitivity of the results to the model's parameters and offer conclusions and shows that reputation building is possible in a model of asymmetric information. It explores the sensitivity of the equilibria to changes in magnitudes and orderings of the payoffs after the equilibria have been derived. Payoffs in the game must represent the payoffs to decision makers involved in the war on terrorism for the model to represent real world terrorism. Thus, the conventional wisdom that refusal to negotiate with terrorists will avert future terrorism only requires that the terrorist have a small amount of incomplete information. The conventional wisdom that governments should build reputations as not bargaining with terrorists holds in models of incomplete information.
