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Side-payments and the costs of conflict

  • Kimbrough, Erik O.
  • Sheremeta, Roman M.

Conflict and competition often impose costs on both winners and losers, and conflicting parties may prefer to resolve a 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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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 31 (2013)
Issue (Month): 3 ()
Pages: 278-286

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Handle: RePEc:eee:indorg:v:31:y:2013:i:3:p:278-286
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