Peace keeping in a model of conflict with foreign investments

Purpose - This paper aims to examine the role of outside peacekeepers in a bilateral conflict. Design/methodology/approach - The authors build upon a trade theoretic framework by incorporating disruptions due to war, which could affect directly the return to investment, both domestic and foreign, and by introducing explicitly peacekeeping forces into the model. Two countries are engaged in a war, with the purpose of capturing capital. A third country plays a dual role: it is the source of investments in the warring countries, and it deploys soldiers on ground for peacekeeping purposes. The authors consider the cases where the levels of foreign investments are exogenous and when they are endogenously determined by free mobility conditions. In the worst case, they find that foreign investment reduces conflict. In the case of endogenous foreign investments, they examine the effect of multilateral agreements where the two warring countries reduce their number of soldiers and the third increases the number of peacekeepers. Findings - The authors find that the reform benefits all three countries and increases the level of foreign investments. They consider the cases of exogenous and endogenous foreign direct investment (FDI). In the first case, the authors examine the effect of an exogenous increase in FDI on the war equilibrium and find that it reduces the employment of soldiers in the warring countries and increases the size of the peacekeeping force. They also find that the first-best level of peacekeeping is larger than the equilibrium level. When FDI is endogenous, starting from the initial war equilibrium, they also examine the effect of a multilateral agreement in which the size of the peacekeeping force is increased by the third country and the two warring countries agree to reduce their war efforts. The authors find that the reform makes all three countries better off and increases the level of FDI. Originality/value - The paper uses a theoretical model with third-party interventions in a bilateral war. It intends to shed light on some of the missing economic implications of peacekeeping. The paper introduces explicitly peacekeeping forces into the analysis and introduces a factor that represents a disruption to return on investment in both warring countries. The third country has a dual role; it provides investments in the warring countries and deploys soldiers for peacekeeping. Peacekeeping reduces the disruption mentioned above and affects the employment of soldiers by the warring countries. The authors find that a multilateral agreement in which the two warring countries reduce their war efforts and the third party increases its peacekeeping force can increase welfare in all three countries.