Conflict Onset and Intensity: A Contest Model with Reference-Dependent Preferences

Abstract

This paper studies the determinants of conflict and its intensity in a two-stage winner take-all contest model where agents have reference-dependent preferences. First, reference points are crucial in the decision of waging war, and if war is declared it is done by the disadvantaged group, never by the advantaged group. Second, reference dependent preferences makes conflict more intense compared to standard preferences. Moreover, if conflict is waged, the advantaged group spend more resources in the conflict because they have more to lose than win from warfare. The model delivers predictions in line with existing evidence and explains common empirical regularities: (i) conflict is more likely to occur after negative income shocks since agents’ current situation is perceived as a loss compared to the status quo; (ii) income reduces the odds of conflict if agents are more risk-averse for gains than risk-seeking for losses.

Keywords: Conflict, war, contests, reference point, loss aversion, income