Side-Payments and the Costs of Conflict

33 Pages Posted: 5 Feb 2012 Last revised: 20 May 2015

See all articles by Roman M. Sheremeta

Roman M. Sheremeta

Case Western Reserve University

Erik O. Kimbrough

Chapman University - The George L. Argyros School of Business & Economics

Date Written: 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.

Keywords: contests, conflict resolution, side-payments, experiments

JEL Classification: C72, C91, D72

Suggested Citation

Sheremeta, Roman M. and Kimbrough, Erik O., Side-Payments and the Costs of Conflict (February 3, 2012). International Journal of Industrial Organization, Vol. 31, No. 3, 2013, Available at SSRN: or

Roman M. Sheremeta (Contact Author)

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

Erik O. Kimbrough

Chapman University - The George L. Argyros School of Business & Economics ( email )

One University Dr
Orange, CA 92866
United States

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