IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Side-Payments and the Costs of Conflict

  • 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)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.chapman.edu/ESI/wp/Sheremeta_Side-PaymentsCostsofConflict.pdf
Download Restriction: no

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

as
in new window

Length: 41 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:chu:wpaper:12-01
Contact details of provider: Postal:
One University Drive, Orange, CA 92866

Phone: (714) 628-2830
Fax: (714) 628-2881
Web page: http://www.chapman.edu/esi/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Roman M. Sheremeta & Jingjing Zhang, 2009. "Can Groups Solve the Problem of Overbidding in Contests?," Department of Economics Working Papers 2009-05, McMaster University.
  2. Roman M. Sheremeta, 2010. "Expenditures and Information Disclosure in Two-Stage Political Contests," Journal of Conflict Resolution, Peace Science Society (International), vol. 54(5), pages 771-798, October.
  3. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 281-315.
  4. Mary L. Rigdon & Kevin A. McCabe & Vernon L. Smith, 2007. "Sustaining Cooperation in Trust Games," Economic Journal, Royal Economic Society, vol. 117(522), pages 991-1007, 07.
  5. Garfinkel, Michelle R. & Skaperdas, Stergios, 2007. "Economics of Conflict: An Overview," Handbook of Defense Economics, Elsevier.
  6. Potters, Jan & de Vries, Casper G. & van Winden, Frans, 1998. "An experimental examination of rational rent-seeking," European Journal of Political Economy, Elsevier, vol. 14(4), pages 783-800, November.
  7. Abbink, Klaus & Bernd Irlenbusch & Elke Renner, 1999. "An Experimental Bribery Game," Discussion Paper Serie B 459, University of Bonn, Germany.
  8. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  9. Linster, Bruce G, 1994. "Cooperative Rent-Seeking," Public Choice, Springer, vol. 81(1-2), pages 23-34, October.
  10. Joan Esteban & József Sákovics, 2008. "A Theory of Agreements in the Shadow of Conflict: The Genesis of Bargaining Power," Theory and Decision, Springer, vol. 65(3), pages 227-252, November.
  11. Jack Hirshleifer, 1995. "Theorizing About Conflict," UCLA Economics Working Papers 727, UCLA Department of Economics.
  12. Jehiel, Philippe & Benny Moldovanu, 1994. "Strategic Non-Participation," Discussion Paper Serie B 287, University of Bonn, Germany.
  13. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  14. Moldovanu, Benny & Sela, Aner, 1999. "The Optimal Allocation of Prizes in Contests," Sonderforschungsbereich 504 Publications 99-75, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  15. Roman M. Sheremeta, 2011. "Contest Design: An Experimental Investigation," Economic Inquiry, Western Economic Association International, vol. 49(2), pages 573-590, 04.
  16. Sheremeta, Roman, 2009. "Experimental Comparison of Multi-Stage and One-Stage Contests," MPRA Paper 49884, University Library of Munich, Germany.
  17. Susanne Büchner & Andreas Freytag & Luis G. Gonzalez & Werner Güth, 2006. "Bribery and Public Procurement - An Experimental Study -," Papers on Strategic Interaction 2005-30, Max Planck Institute of Economics, Strategic Interaction Group.
  18. Lambert Schoonbeek, 2009. "Bribing potential entrants in a rent-seeking contest," Public Choice, Springer, vol. 139(1), pages 153-158, April.
  19. Schmalensee, Richard, 1987. "Competitive advantage and collusive optima," International Journal of Industrial Organization, Elsevier, vol. 5(4), pages 351-367.
  20. Muthoo, Abhinay, 2004. "A model of the origins of basic property rights," Games and Economic Behavior, Elsevier, vol. 49(2), pages 288-312, November.
  21. Wilkie, Simon & Jackson, Matthew O., 2002. "Endogenous Games and Mechanisms: Side Payments Among Players," Working Papers 1150, California Institute of Technology, Division of the Humanities and Social Sciences.
  22. Tor Eriksson & Sabrina Teyssier & Marie Claire Villeval, 2006. "Self-selection and the Efficiency of Tournaments," Post-Print halshs-00175469, HAL.
  23. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 283-290.
  24. Jinkwon Lee, 2007. "Repetition And Financial Incentives In Economics Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 21(3), pages 628-681, 07.
  25. Michelle R Garfinkel & Stergios Skaperdas, 2001. "Conflict Without Misperceptions or Incomplete Information: How the Future Matters," Levine's Working Paper Archive 563824000000000011, David K. Levine.
  26. Kathryn E. Spier, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 93-108.
  27. Stergios Skaperdas, 2006. "Bargaining Versus Fighting," Working Papers 060705, University of California-Irvine, Department of Economics.
  28. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  29. Murnighan, J. Keith, 2008. "Fairness in Ultimatum Bargaining," Handbook of Experimental Economics Results, Elsevier.
  30. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
  31. Konrad, Kai A., 2009. "Strategy and Dynamics in Contests," OUP Catalogue, Oxford University Press, number 9780199549603, December.
  32. Anbarci, N. & Skaperdas, S. & Syropoulos, C., 2000. "Comparing Bargaining Solutions in the Shadow of Conflict: How Norms Against Threats Can Have Real Effects," Papers 00-01-19, California Irvine - School of Social Sciences.
  33. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
  34. Abbink, Klaus, 2004. "Staff rotation as an anti-corruption policy: an experimental study," European Journal of Political Economy, Elsevier, vol. 20(4), pages 887-906, November.
  35. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
  36. Douglas Davis & Robert Reilly, 1998. "Do too many cooks always spoil the stew? An experimental analysis of rent-seeking and the role of a strategic buyer," Public Choice, Springer, vol. 95(1), pages 89-115, April.
  37. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  38. Laura Schechter, 2007. "Theft, Gift-Giving, and Trustworthiness: Honesty Is Its Own Reward in Rural Paraguay," American Economic Review, American Economic Association, vol. 97(5), pages 1560-1582, December.
  39. Michelle R. Garfinkel & Stergios Skaperdas, 2000. "Conflict without Misperceptions or Incomplete Information," Journal of Conflict Resolution, Peace Science Society (International), vol. 44(6), pages 793-807, December.
  40. Guth, Werner & Tietz, Reinhard, 1990. "Ultimatum bargaining behavior : A survey and comparison of experimental results," Journal of Economic Psychology, Elsevier, vol. 11(3), pages 417-449, September.
  41. Price, Curtis & Sheremeta, Roman, 2011. "Endowment Effects in Contests," MPRA Paper 52103, University Library of Munich, Germany.
  42. Baye, Michael R. & Hoppe, Heidrun C., 2003. "The strategic equivalence of rent-seeking, innovation, and patent-race games," Games and Economic Behavior, Elsevier, vol. 44(2), pages 217-226, August.
  43. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
  44. Green, Edward J. & Porter, Robert H., 1982. "Noncooperative Collusion Under Imperfect Price Information," Working Papers 367, California Institute of Technology, Division of the Humanities and Social Sciences.
  45. Kahn, Lawrence M. & Murnighan, J. Keith, 2008. "Payoff Uncertainty and Cooperation in Finitely-repeated Prisoner's Dilemma Games," Handbook of Experimental Economics Results, Elsevier.
  46. Urs Schweizer, 1989. "Litigation and Settlement under Two-Sided Incomplete Information," Review of Economic Studies, Oxford University Press, vol. 56(2), pages 163-177.
  47. Lin, Ping, 1996. "Fixed-Fee Licensing of Innovations and Collusion," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 443-49, December.
  48. Damiano Silipo, 2005. "The Evolution of Cooperation in Patent Races:Theory and Experimental Evidence," Journal of Economics, Springer, vol. 85(1), pages 1-38, 07.
  49. Robert Porter, 2005. "Detecting Collusion," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(2), pages 147-167, December.
  50. Charness, Gary & Frechette, Guillaume R. & Qin, Cheng-Zhong, 2007. "Endogenous transfers in the Prisoner's Dilemma game: An experimental test of cooperation and coordination," Games and Economic Behavior, Elsevier, vol. 60(2), pages 287-306, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:chu:wpaper:12-01. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Megan Luetje)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.