War Signals: A Theory of Trade, Trust and Conflict

University of Zurich Economics Working Paper No. 13

50 Pages Posted: 6 Apr 2011

See all articles by Dominic Rohner

Dominic Rohner

University of Zurich

Mathias Thoenig

University of Lausanne

Fabrizio Zilibotti

Yale University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2011


We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabitated by two ethnic groups. Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade. Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation. The theory bears a set of testable predictions. First, war is a stochastic process whose frequency depends on the state of endogenous beliefs. Second, the probability of future conflicts increases after each conflict episode. Third, "accidental" conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts (a war trap). The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs. Coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.

Keywords: Beliefs, civil war, conflict, cultural transmission, ethnic fractionalization, human capital investments, learning, matching, peacekeeping, stochastic war, strategic complementarity, trade

JEL Classification: D74, D83, O15, Q34

Suggested Citation

Rohner, Dominic and Thoenig, Mathias and Zilibotti, Fabrizio, War Signals: A Theory of Trade, Trust and Conflict (March 15, 2011). University of Zurich Economics Working Paper No. 13, Available at SSRN: https://ssrn.com/abstract=1799949 or http://dx.doi.org/10.2139/ssrn.1799949

Dominic Rohner (Contact Author)

University of Zurich ( email )

Muehlebachstrasse 86
Zurich, 8008

Mathias Thoenig

University of Lausanne ( email )

Fabrizio Zilibotti

Yale University ( email )

New Haven, CT 06520
United States

Centre for Economic Policy Research (CEPR)

United Kingdom

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