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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.

Suggested Citation

  • Erik O. Kimbrough & Roman M. Sheremeta, 2012. "Side-Payments and the Costs of Conflict," Working Papers 12-01, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:12-01
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    Cited by:

    1. Herbst, Luisa & Konrad, Kai A. & Morath, Florian, 2017. "Balance of power and the propensity of conflict," Games and Economic Behavior, Elsevier, vol. 103(C), pages 168-184.
    2. Roman M. Sheremeta, 2016. "The pros and cons of workplace tournaments," IZA World of Labor, Institute for the Study of Labor (IZA), pages 302-302, October.
    3. Kyung Hwan Baik & Subhasish M. Chowdhury & Abhijit Ramalingam, 2015. "Group size and matching protocol in contests," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 13-11R, School of Economics, University of East Anglia, Norwich, UK..
    4. Bayer, Ralph-Christopher, 2016. "Cooperation and distributive conflict," Games and Economic Behavior, Elsevier, vol. 97(C), pages 88-109.
    5. Michael Caldara & Michael T. McBride & Matthew W. McCarter & Roman M. Sheremeta, 2017. "A Study of the Triggers of Conflict and Emotional Reactions," Games, MDPI, Open Access Journal, vol. 8(2), pages 1-12, April.
    6. 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.
    7. 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.
    8. Roman M. Sheremeta, 2014. "Behavioral Dimensions of Contests," Working Papers 14-14, Chapman University, Economic Science Institute.
    9. 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.
    10. Lacomba, Juan A. & Lagos, Francisco & Reuben, Ernesto & van Winden, Frans, 2017. "Decisiveness, peace, and inequality in games of conflict," Journal of Economic Psychology, Elsevier, vol. 63(C), pages 216-229.
    11. Emmanuel Dechenaux & Dan Kovenock & Roman Sheremeta, 2015. "A survey of experimental research on contests, all-pay auctions and tournaments," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 609-669, December.
    12. 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.
    13. 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.
    14. Kimbrough, Erik O. & Rubin, Jared & Sheremeta, Roman M. & Shields, Timothy W., 2015. "Commitment problems in conflict resolution," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 33-45.
    15. Lacomba, Juan A. & Lagos, Francisco & Reuben, Ernesto & van Winden, Frans, 2014. "On the escalation and de-escalation of conflict," Games and Economic Behavior, Elsevier, vol. 86(C), pages 40-57.
    16. Kimbrough, Erik & Laughren, Kevin & Sheremeta, Roman, 2017. "War and Conflict in Economics: Theories, Applications, and Recent Trends," MPRA Paper 80277, University Library of Munich, Germany.
    17. repec:elg:eechap:15325_10 is not listed on IDEAS
    18. Roman M. Sheremeta, 2013. "Overbidding And Heterogeneous Behavior In Contest Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 491-514, July.
    19. Subhasish M. Chowdhury & Anwesha Mukherjee & Theodore L. Turocy, 2016. "That's the ticket: Explicit lottery randomisation and learning in Tullock contests," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 16-07, School of Economics, University of East Anglia, Norwich, UK..
    20. Tatsuyoshi Saijo & Takehito Masuda & Takafumi Yamakawa, "undated". "Approval Mechanism to Solve Prisoner’s Dilemma: Comparison with Varian’s Compensation Mechanism," Working Papers SDES-2016-15, Kochi University of Technology, School of Economics and Management.
    21. repec:spr:sochwe:v:51:y:2018:i:1:d:10.1007_s00355-017-1107-z is not listed on IDEAS
    22. Sheremeta, Roman, 2015. "Behavior in Group Contests: A Review of Experimental Research," MPRA Paper 67515, University Library of Munich, Germany.
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    25. Sheremeta, Roman, 2014. "Behavior in Contests," MPRA Paper 57451, University Library of Munich, Germany.

    More about this item

    Keywords

    contests; conflict resolution; side-payments; experiments;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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