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How Opportunity Costs Decrease the Probability of War in an Incomplete Information Game

Author

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  • Polachek, Solomon

    () (Binghamton University, New York)

  • Xiang, Jun

    () (Rutgers University)

Abstract

This paper shows that the opportunity costs resulting from economic interdependence decrease the equilibrium probability of war in an incomplete information game. This result is strongly consistent with existing empirical analyses of the inverse trade-conflict relationship, but is the opposite of the conclusion reached by Gartzke et al. (2001), who reject the opportunity cost argument in a game-theoretic framework. As a result of this paper's findings, one cannot dismiss the opportunity cost argument as the explanation why trading nations fight less. Instead this study reaffirms the central position of opportunity costs as the basis for the inverse trade-conflict relationship, thus implying that one need not rely on signaling.

Suggested Citation

  • Polachek, Solomon & Xiang, Jun, 2008. "How Opportunity Costs Decrease the Probability of War in an Incomplete Information Game," IZA Discussion Papers 3883, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3883
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    References listed on IDEAS

    as
    1. Katherine Barbieri, 1996. "Economic Interdependence: A Path to Peace or a Source of Interstate Conflict?," Journal of Peace Research, Peace Research Institute Oslo, vol. 33(1), pages 29-49, February.
    2. Solomon William Polachek, 1980. "Conflict and Trade," Journal of Conflict Resolution, Peace Science Society (International), vol. 24(1), pages 55-78, March.
    3. Philippe Martin & Thierry Mayer & Mathias Thoenig, 2008. "Make Trade Not War?," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 865-900.
    4. John R. Oneal & Bruce Russett, 1999. "Assessing the Liberal Peace with Alternative Specifications: Trade Still Reduces Conflict," Journal of Peace Research, Peace Research Institute Oslo, vol. 36(4), pages 423-442, July.
    5. James D. Morrow, 1999. "How Could Trade Affect Conflict?," Journal of Peace Research, Peace Research Institute Oslo, vol. 36(4), pages 481-489, July.
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    Cited by:

    1. Polachek Solomon W, 2011. "Current Research and Future Directions in Peace Economics: Trade Gone Awry," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 16(2), pages 1-14, January.
    2. Geesche M. Merkle & Rico Ihle & Yael Kachel & Ulf Liebe, 2013. "Economic cooperation despite of political conflict: Israeli traders’ perception of Israeli-Palestinian food trade," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 151, Courant Research Centre PEG.
    3. Polachek Solomon W & Xiang Jun, 2010. "Opportunity Costs and the Probability of War in an Incomplete Information Game (With Comments by Lloyd Jeff Dumas)," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 16(1), pages 1-6, June.
    4. Xiang Jun & Primiano Christopher B. & Huang Wei-hao, 2015. "Aggressive or Peaceful Rise? An Empirical Assessment of China’s Militarized Conflict, 1979–2010," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 21(3), pages 301-325, August.

    More about this item

    Keywords

    war; trade; trade-conflict relationship; interdependence; conflict; incomplete information game; signaling;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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