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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.

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File URL: http://www.chapman.edu/ESI/wp/Sheremeta_Side-PaymentsCostsofConflict.pdf
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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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