Economic Decoupling as a Readiness Signaling Device

This paper presents a game-theoretic analysis of economic decoupling as a deterrence mechanism amid the renewed risk of international conflict between two economically integrated superpowers. In our model, a potential aggressor considers initiating military conflict, while the defender, anticipating this risk, can preemptively decouple to signal its readiness to resist aggression. We examine both a full-information game and a more realistic setting with incomplete information about the defender's priorities. Under full information, we identify the optimal degree of decoupling that ensures effective deterrence. With incomplete information, deterrence becomes more fragile: although a peace equilibrium remains possible within a narrower parameter range, hybrid equilibria, where conflict occurs with positive probability, also emerge. The results highlight how even minor informational imperfections can generate intrinsic geopolitical instability, emphasizing the fragility of peace under conditions of economic interdependence.