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How Opportunity Costs Decrease the Probability of War in an Incomplete Information Game

19 Pages Posted: 15 Dec 2008  

Solomon W. Polachek

State University of New York at Binghamton; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Jun Xiang

University of Rochester

Abstract

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.

Keywords: war, conflict, trade, trade-conflict relationship, interdependence, incomplete information game, signaling

JEL Classification: F10, C7, P16

Suggested Citation

Polachek, Solomon W. and Xiang, Jun, How Opportunity Costs Decrease the Probability of War in an Incomplete Information Game. IZA Discussion Paper No. 3883. Available at SSRN: https://ssrn.com/abstract=1315922 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Solomon W. Polachek (Contact Author)

State University of New York at Binghamton ( email )

Binghamton, NY 13902-6000
United States
607-777-2144 (Phone)
607-777-4900 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Jun Xiang

University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

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