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Side-Payments and the Costs of Conflict

  • Kimbrough, Erik
  • Sheremeta, Roman

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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 46808.

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Date of creation: 03 Feb 2013
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Publication status: Published in International Journal of Industrial Organization 31 (2013): pp. 278-286
Handle: RePEc:pra:mprapa:46808
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