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War Signals: A Theory of Trade, Trust and Conflict

  • Dominic Rohner
  • Mathias Thoenig
  • Fabrizio Zilibotti

We construct a dynamic theory of civil con‡ict hinging on inter-ethnic trust and trade. The model economy is inhabitated 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 con‡ict 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 re‡ect 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 Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 058.

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Date of creation: 2011
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Handle: RePEc:oxf:oxcrwp:058
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