How Opportunity Costs Decrease the Probability of War in an Incomplete Information Game
Solomon W. Polachek
State University of New York at Binghamton; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)
University of Rochester
IZA Discussion Paper No. 3883
This paper shows that the opportunity costs resulting from economic interdependence decrease the equilibrium probability of war in an incomplete information game. This result is strongly consistent with existing empirical analyses of the inverse trade-conflict relationship, but is the opposite of the conclusion reached by Gartzke et al. (2001), who reject the opportunity cost argument in a game-theoretic framework. As a result of this paper's findings, one cannot dismiss the opportunity cost argument as the explanation why trading nations fight less. Instead this study reaffirms the central position of opportunity costs as the basis for the inverse trade-conflict relationship, thus implying that one need not rely on signaling.
Number of Pages in PDF File: 19
Keywords: war, conflict, trade, trade-conflict relationship, interdependence, incomplete information game, signaling
JEL Classification: F10, C7, P16
Date posted: December 15, 2008
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