Side-Payments and the Costs of Conflict
Roman M. Sheremeta
Erik O. Kimbrough
Simon Fraser University
February 3, 2012
Conflict and competition often impose costs on both winners and losers, and conflicting parties may prefer to resolve the dispute before it occurs. The equilibrium of a conflict game with side-payments predicts that with binding offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 87% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 39% of gains come from avoided conflicts and 61% from reduced conflict expenditures.
Number of Pages in PDF File: 33
Keywords: contests, conflict resolution, side-payments, experiments
JEL Classification: C72, C91, D72working papers series
Date posted: February 5, 2012 ; Last revised: December 18, 2012
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