Michelle R. Garfinkel

Economics of Conflict: An Overview

In this chapter, we review the recent literature on conflict and appropriation. Allowing for the possibility of conflict, which amounts to recognizing the possibility that property rights are not perfectly and costlessly enforced, represents a significant departure from the traditional paradigm of economics. The research we emphasize, however, takes an economic perspective. Specifically, it applies conventional optimization techniques and game-theoretic tools to study the allocation of resources among competing activities— productive and otherwise appropriative, such as grabbing the product and wealth of others as well as defending one’s own product and wealth. In contrast to other economic activities in which inputs are combined cooperatively through production functions, the inputs to appropriation are combined adversarially through technologies of conflict. A central objective of this research is to identify the effects of conflict on economic outcomes: the determinants of the distribution of output (or power) and how an individual party’s share can be inversely related to its marginal productivity; when settlement in the shadow of conflict and when open conflict can be expected to occur, with longer time horizons capable of inducing conflict instead of settlement; how conflict and appropriation can reduce the appeal of trade; the determinants of alliance formation and the importance of intra-alliance commitments; how dynamic incentives for capital accumulation and innovation are distorted in the presence of conflict; and the role of governance in conflict management.

Conflict without Misperceptions or Incomplete Information: how the Future Matters

Conflict and war are typically viewed as the outcome of misperceptions, incomplete information, or even irrationality. The authors show that it can be otherwise. Despite the short-run incentives to settle disputes peacefully, there can be long-term, compounding rewards to going to war when doing better relative to ones opponent today implies doing better tomorrow. Peaceful settlement involves not only sharing the pie available today but also foregoing the possibility, brought about by war, of gaining a permanent advantage over ones opponent into the future. The authors show how war emerges as an equilibrium outcome in a model that takes these considerations into account. War is more likely to occur, the more important is the future.

The Political Economy of Conflict and Appropriation

This collection of essays departs from the conventional economic paradigm wherein individuals or groups choose among various productive activities for mutually beneficial trade. Each essay recognizes that where property rights are not well defined or easily enforced, individuals may forgo productive opportunities and engage in appropriative activities to compete for property, income, rights or privileges. Though the essays differ in their focus, each illustrates the importance of the institutional setting in determining economic activity. The first of the two sets of essays examines the allocation of resources among productive and appropriative activities in an anarchical political environment, without legal or constitutional tradition. Their objective is to understand different facets of the emergence of order and restraint on individual behaviour out of conditions with few or no assumed constraints. The second set focuses on different types of political institutions, illustrating how they shape conflict and economic activity, and how they themselves can be shaped by conflict.

Chapter 22 Economics of Conflict: An Overview⁎

Abstract In this chapter, we review the recent literature on conflict and appropriation. Allowing for the possibility of conflict, which amounts to recognizing the possibility that property rights are not perfectly and costlessly enforced, represents a significant departure from the traditional paradigm of economics. The research we emphasize, however, takes an economic perspective. Specifically, it applies conventional optimization techniques and game-theoretic tools to study the allocation of resources among competing activities – productive and otherwise appropriative, such as grabbing the product and wealth of others as well as defending ones own product and wealth. In contrast to other economic activities in which inputs are combined cooperatively through production functions, the inputs to appropriation are combined adversarially through technologies of conflict. A central objective of this research is to identify the effects of conflict on economic outcomes: the determinants of the distribution of output (or power) and how an individual partys share can be inversely related to its marginal productivity; when settlement in the shadow of conflict and when open conflict can be expected to occur, with longer time horizons capable of inducing conflict instead of settlement; how conflict and appropriation can reduce the appeal of trade; the determinants of alliance formation and the importance of intra-alliance commitments; how dynamic incentives for capital accumulation and innovation are distorted in the presence of conflict; and the role of governance in conflict management.

On the Stability of Group Formation: Managing the Conflict Within

This paper develops a positive analysis of stable group formation, highlighting the role of conflict management within groups. The analysis builds on a simple economic model that features a “winner-take-all” contest for control of some resource. When a group forms, members pool their efforts in that contest and, if successful, apply the resource to a joint production process. While reducing the severity of conflict over the contestable resource relative to the case of individual conflict, the formation of groups adds another layer of conflict, that is, one between the members of the winning group over the distribution of their joint product. The effectiveness of conflict management in enabling groups to resolve this second layer of conflict in more “peaceful” ways has some important implications for the equilibrium structure of groups as well as for the allocation of resources.

CONTRACT OR WAR? ON THE CONSEQUENCES OF A BROADER VIEW OF SELF-INTEREST IN ECONOMICS*

The first principle of Economics is that every agent is actuated only by self-interest. The workings of this principle may be viewed under two aspects, according as the agent acts without, or with, the consent of others affected by his actions. In wide senses, the first species of action may be called war, the second, contract.

The Information Content of the Federal Funds Rate: Is It Unique?

This paper investigates the information content of the federal funds rate relative to other market interest rates. The empirical results indicate that the federal funds rate is not informationally superior to the overnight repurchase rate or the three-month T-bill rate. Unanticipated changes in monetary policy do not systematically move the funds rate away from its long-run equilibrium relationship with other short-term interest rates. These results support the efficient-market view that the federal funds rate should not contain more information, including that about monetary policy, than other interest rates. Copyright 1995 by Ohio State University Press.

Election Surprises and Exchange Rate Uncertainty

This papers shows that unexpected election results explain some of the unexpected variation in foreign exchange rates. The result is based on an event study which examines the behavior of the size of forecast errors implied by futures contracts for exchange rates around elections. Though elections can produce large unexpected effects on exchange rates, the effects on forecast errors are short-lived. [ JEL codes: D72, F31.] Copyright 1999 Blackwell Publishers Ltd..

Rules for Dividing a Disputed Resource in the Context of the Classical Liberal Argument for Peace

Abstract In this paper, we study alternative forms of conflict resolution, both peaceful and non-peaceful, between two countries that compete for claims to a resource used to produce potentially traded goods. Consistent with the classical liberal argument, peace supports mutually beneficial trade, whereas war preempts it. War always induces countries to allocate resources into non-contractible arming (“guns”) for superiority in conflict. Under peaceful settlement, countries might choose to arm as well for gaining leverage in negotiations, but arming is typically less than what it is under war. Building on the observation that arming itself affects the countries’ bargaining sets, we compare the efficiency properties of division rules generated by three prominent bargaining solutions – namely, splitting the surplus, equal sacrifice, and Nash bargaining – and show how they depend on the gains from trade.

Protecting the Military

ing from political institutions and conflict among policymakers, our analysis predicts a positive bias in military spending under the assumption that the reallocation of labor resources from one sector to another is not costless. Upon realizing a favorable shock to national security, the government faces a trade-off in shifting labor resources to civilian production activities: though the nation can enjoy both higher security and greater consumption, the displaced military personnel are forced to accept a lower utility than those who remain employed in that sector. If the adjustment costs are not too large, the ability to precommit would support a second-best policy that provides some protection to military personnel, while also realizing some of the increased consumption opportunities afforded by the favorable shock to national security. But, the governments inability to precommit leads to excessive protection of military workers-further limiting the adjustment of resources and the increased consumption opportunities realized in equilibrium. Though political considerations have not been formally introduced into the model, their effects should be fairly clear. Suppose, for example, that the government values security by more than do the nations citizens. Then, the equilibrium would generally exhibit a positive bias in spending on military bases relative to the allocation chosen by the benevolent social planner. Even in this case, an exogenous increase in national security would prompt some adjustment in labor resources, but the adjustment would be sluggish and, moreover, incomplete relative to that under a benevolent social planner. Similarly, the credibility issue discussed here should augment the This content downloaded from 207.46.13.101 on Sat, 08 Oct 2016 05:57:05 UTC All use subject to http://about.jstor.org/terms PROTECTING THE MILITARY 1005 distortions identified in the public choice literature. Specifically, in the context of those analyses emphasizing legislative objectives, the policymaker would fully internalize the adjustment costs generated by closing a base in his district, but would fail to account for the benefits realized by all taxpayers fully. As such, the distributional loss receives more weight in that policymakers decision and he is less likely to follow through on an announced base closure action given that none of the base employees have prepared for that action. One interesting and important extension of the analysis is to treat military spending by other nations as endogenous. We conjecture that, insofar as the incentive of each nation to arm depends positively on the level of spending by other nations, any program that enhances the credibility of one nations base closure policy would imply less military spending by the other nations as well in a non-cooperative equilibrium.