Productivity Shocks and Conflict

40 Pages Posted: 8 Dec 2021

See all articles by Biljana Meiske

Biljana Meiske

Max Planck Institute for Tax Law and Public Finance; Ludwig-Maximilians-University Munich

Date Written: November 30, 2021

Abstract

This paper studies the consequences of productivity shocks on conflict behavior in the presence of loss aversion. In a first step, I incorporate expectation based loss preferences à la Köszegi and Rabin (2006, 2007) into a Hirshleifer-Skaperdas conflict game and show that negative productivity shocks entail larger conflict investments if agents are loss averse (and smaller investments if agents are gain-seeking); the reverse holds in case of a positive productivity shock. In a second step, a lab experiment (N=496) was conducted with participants playing repeated guns-and-butter conflict game under changing productivity regimes. The experimental results reveal that while negative productivity shocks (channeled through loss aversion) have the predicted effects, positive productivity shocks lead to the predicted increase in conflict investment among gain-seeking, but fail to reduce conflict investment among loss-averse participants. Furthermore, absent any changes in productivity level, conflict investments are shown to increase in the level of loss aversion.

Keywords: D91, C92, D72, D74

JEL Classification: conflict, rent-seeking, loss aversion, reference, dependence, productivity shocks

Suggested Citation

Meiske, Biljana, Productivity Shocks and Conflict (November 30, 2021). Working Paper of the Max Planck Institute for Tax Law and Public Finance No. 2021-18, Available at SSRN: https://ssrn.com/abstract=3974601 or http://dx.doi.org/10.2139/ssrn.3974601

Biljana Meiske (Contact Author)

Max Planck Institute for Tax Law and Public Finance ( email )

Marstallplatz 1
Munich, 80539
Germany

Ludwig-Maximilians-University Munich ( email )

Germany

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