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Side-Payments and the Costs of Conflict

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  • Erik O. Kimbrough

    ()
    (Department of Economics (AE1), School of Business and Economics, Maastricht University)

  • Roman M. Sheremeta

    (Argyros School of Business and Economics, Chapman University)

Abstract

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.

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Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 12-01.

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Length: 41 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:chu:wpaper:12-01

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

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Citations

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Cited by:
  1. Erik O Kimbrough & Roman M Sheremeta, 2014. "Why can’t we be friends? Entitlements and the costs of conflict," Working Papers 14-01, Chapman University, Economic Science Institute.
  2. Mago, Shakun D. & Sheremeta, Roman M. & Yates, Andrew, 2013. "Best-of-three contest experiments: Strategic versus psychological momentum," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 287-296.
  3. Smith, Adam C. & Houser, Daniel & Leeson, Peter T. & Ostad, Ramin, 2014. "The costs of conflict," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 61-71.
  4. Kimbrough, Erik O. & Sheremeta, Roman M. & Shields, Timothy W., 2014. "When parity promotes peace: Resolving conflict between asymmetric agents," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 96-108.
  5. Lacomba, Juan A. & Lagos, Francisco & Reuben, Ernesto & van Winden, Frans, 2013. "On the Escalation and De-Escalation of Conflict," IZA Discussion Papers 7492, Institute for the Study of Labor (IZA).
  6. Roman M. Sheremeta, 2013. "Overbidding and Heterogeneous Behavior in Contest Experiments," Working Papers 13-06, Chapman University, Economic Science Institute.
  7. Erik O. Kimbrough & Jared Rubin & Roman M. Sheremeta & Timothy Shields, 2013. "Commitment Problems in Conflict Resolution," Working Papers 13-11, Chapman University, Economic Science Institute.
  8. Erik O. Kimbrough & Roman M. Sheremeta, 2012. "Why Can’t We Be Friends? Entitlements, bargaining, and conflict," Working Papers 12-16, Chapman University, Economic Science Institute.

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