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War Signals: A Theory of Trade, Trust, and Conflict

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  • Dominic Rohner
  • Mathias Thoenig
  • Fabrizio Zilibotti

Abstract

We construct a theory of persistent civil conflicts, where persistence is driven by the endogenous dynamics of inter-ethnic trust and trade. In times of peace, agents belonging to two groups are randomly matched to trade bilaterally. Trade hinges on trust and cooperation. The onset of conflict signals that the aggressor has a low propensity to cooperate, harming future trust and trade. Agents observe the history of conflicts and update their beliefs over time. The theory predicts that civil wars are persistent. Moreover, even accidental conflicts that do not reflect economic fundamentals erode trust, and can plunge a society into a vicious cycle of recurrent conflicts (a war trap). The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs. Coercive peace policies, such as peacekeeping forces or externally imposed regime changes, have no enduring effects. Copyright 2013, Oxford University Press.

Suggested Citation

  • Dominic Rohner & Mathias Thoenig & Fabrizio Zilibotti, 2013. "War Signals: A Theory of Trade, Trust, and Conflict," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 1114-1147.
    • Handle: RePEc:oup:restud:v:80:y:2013:i:3:p:1114-1147
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    File URL: http://hdl.handle.net/10.1093/restud/rdt003
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    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts

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