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

  • Polachek, Solomon

    ()

    (Binghamton University, New York)

  • Xiang, Jun

    ()

    (Rutgers University)

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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3883.

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Length: 19 pages
Date of creation: Dec 2008
Date of revision:
Publication status: published in: International Organization, 2010, 64 (1), 133-144
Handle: RePEc:iza:izadps:dp3883
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  1. Martin, Philippe & Mayer, Thierry & Thoenig, Mathias, 2005. "Make Trade not War?," CEPR Discussion Papers 5218, C.E.P.R. Discussion Papers.
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