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War Signals: A Theory of Trade, Trust and Conflict

  • Dominic Rohner


    (Department of Economics, University of Zurich)

  • Mathias Thoenig


    (Department of Economics, University of Lausanne)

  • Fabrizio Zilibottix


    (Department of Economics, University of Zurich)

We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabited by two ethnic groups. Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade. Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation. The theory bears a set of testable predictions. First, war is a stochastic process whose frequency depends on the state of endogenous beliefs. Second, the probability of future conflicts increases after each conflict episode. Third, "accidental" conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging 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 instead no persistent effects.

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Paper provided by Households in Conflict Network in its series HiCN Working Papers with number 95.

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Length: 49 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:hic:wpaper:95
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