Economic Analysis Of Conflict

Economic Analysis of Conflict

TODD SANDLER

School of International Relations

University of Southern California

Living beings everywhere compete for the means of existence. Competition takes the more intense form we call conflict when, instead of merely using available resources for productive or consumptive purposes, contenders try to hamper, disable, or destroy rivals. Conflict theory has to deal not only with the standard technology of production, but also with the technology of struggle. . . . Exchange theory and conflict theory constitute two coequal branches of economic analysis: the former based upon two-sided advantage and contract, the latter upon one-sided advantage and struggle.

—Jack Hirshleifer (1995, 167)

Economists have increasingly turned their attention to the study of conflict and its resolution in the past four decades. There was a time when virtually all of the work in this area was done by political scientists, but this has changed with pathbreaking work by Kenneth Boulding, Jack Hirshleifer, Herschel Grossman, Martin McGuire, Mancur Olson, Thomas Schelling, Ron Smith, Dagobert Brito, Albert O. Hirschman, Michael Intriligator, Walter Isard, Michelle Garfinkel, Stergios Skaperdas, Charles Anderton, Paul Collier, and others. Conflict can occur within states as civil wars, insurrections, or terrorism, or it can occur among states as wars or outside-supported insurrections. Appropriative activities, in which one agent takes from another, can be within or among states. Certainly, the failure to protect and enforce property rights within a nation can have profound consequences on economic activity and growth. If people have to spend some of their resources guarding their possessions and the fruits of their labor, there are fewer resources for productive activities. In addition, there is less incentive to produce as the probability increases that this production can be stolen. Governments arise from a natural state of anarchy, in large part to protect these prop- erty rights in return for taxes to support this protection, other services, and those in government. In some autocratic regimes, this appropriation by government may far surpass the financing of protection and may serve to increase the ruler’s wealth. To maximize its tax revenues, even autocratic governments face limits to how much they can appropriate (McGuire and Olson 1996; Olson 2000). Surpass these bounds and output declines and, with this decline, taxes decrease. In addition, if too much is appro- priated, people resist, and the government has to channel more resources into its mili- tary and police to hold incipient rebellions in check (Grossman 1995). Resources allo-

AUTHOR’S NOTE: Sandler holds the Robert R. and Katheryn A. Dockson Chair in International Rela- tions and Economics. I have profited from comments provided by Daniel Arce and Charles Anderton.

JOURNAL OF CONFLICT RESOLUTION, Vol. 44 No. 6, December 2000 723-729

© 2000 Sage Publications, Inc.

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cated to subdue the populace cannot then be siphoned off by the rulers and/or government officials. Economic analysis underscores the essential trade-offs involved in addressing appropriative behavior.

In recent years, game theory has become the premier theoretical tool in economics and political science. Strategic behavior, the hallmark of game theory, involves how one agent (e.g., person, nation, ruler, firm, government, or institution) behaves when its choice is interdependent with that of others. Interactive choices that cause players’ payoffs to be interdependent are viewed as strategic. Strategic behavior also includes a recognition of this interdependence; one player thinks that the opponent(s) will behave in a certain manner and acts on this belief. Similarly, the opponent anticipates the other player’s belief-based actions and chooses a strategy based on this belief, and so it goes. Game theory provides an ideal tool in economics to analyze conflict, in which oppo- nents are engaged in intense struggles with one another over property and lives. Most of the articles in this special issue use game theory and its concepts such as that of Nash equilibrium, a position from which no player would unilaterally want to change his or her strategy. Opponents may include government forces and rebels, a ruler and sub- jects, a government and terrorists, opposing alliances, or countries at conflict over nat- ural resources. The underlying game may be played just once or repeatedly. Moreover, in a repeated game framework, the players may remain the same or else change from one period to the next. When population dynamics are allowed so that players’ types and their composition in the population can change over time, an evolutionary game framework applies (Vega-Redondo 1996).

Conflict may assume myriad forms and may influence a vast array of human activi- ties. In politics, conflict may be over a party’s nomination or the votes to win an elected office, or it may arise from rent seeking. Rent seeking involves an agent or collective expending resources to obtain a return that results in no net gain to society; that is, rent seeking concerns actions to gain a transfer of resources. A related notion is that of con- tests or tournaments in which players expend resources to vie with one another for a prize or recognition (Dixit 1987). From a mathematical modeling viewpoint, rent seeking and contests are structurally identical. Conflict may also involve litigation and legal maneuvers over the disposition of wills or property. In labor markets, conflict is associated with strikes, labor lockouts, and employee-employer renumerations and benefits. Conflict also concerns terrorist campaigns designed to achieve political objectives, including resource transfers (Enders and Sandler 1995). In each of these examples of struggles, the outcome is affected by a contest success function, which defines an appropriative outcome based on the “inputs” of fighting effort. Such func- tions form the foundation of many economic analyses of conflict and figure strongly in this special issue’s articles by Jack Hirshleifer, Michelle Garfinkel and Stergios Skaperdas, Dmitriy Gershenson and Herschel Grossman, Charles Anderton, Paul Collier, and Donald Wittman.

During the 21st century, conflict will involve Earth’s natural assets, including its species, water, rivers, oceans, atmosphere, ozone shield, and minerals. As populations grow and the Earth’s carrying capacity is increasingly exceeded, more effort will be put into the appropriation of needed resources, resulting in conflict and defense grow- ing in importance. Disputes over territories and resources already represent the leading

cause of civil war and interstate conflicts. Given the prevalence of conflict and its influence on resource allocation and income distribution, it is surprising that it has taken this long for economists to show an interest in its study.

The purpose of this special issue is to apply economic methods to the study of con- flict and related issues. The contributors to this issue are some of the leading econo- mists who have written about conflict over the past three decades. A variety of issues are examined with diverse methodologies.

COVERAGE OF THE SPECIAL ISSUE

McGuire’s (2000 [this issue]) article on managing supply uncertainties in an era of globalization applies concepts from the study of insurance and risk to develop a uni- fied analysis for providing for war or other adversity through either stockpiling of goods or protecting domestic industries via subsidization. This article shows the appli- cability of the notion of the “perfect insurance reversal paradox,” in which the pur- chase of insurance is such that the “bad” state is more preferred after the transfer than was the “good” state of the world prior to the transfer. In particular, the article indicates the circumstances when stockpiling is preferable to protecting domestic producers. McGuire’s article is important because it has much to say about options that nations can rely on to manage risk at a time when the globalization of markets heightens nations’ vulnerabilities to shocks beyond their control. Political instabilities in devel- oping countries that supply strategic resources represent yet another factor that neces- sitates insurance against contingencies. A logical extension of his contribution would be to expand the framework to consider other means for addressing uncertainties such as the formation of special agreements to guarantee supply.

In the biodiversity article, Arce (2000 [this issue]) studies an intergenerational pub- lic good whose benefits are nonexcludable and nonrival within and among countries and generations. The overall level of a public good is typically represented as being composed of the sum of agents’ contributions or efforts. With such a “summation” contribution aggregator, the underlying game is frequently that of the prisoner’s dilemma, which may not bode well for a positive outcome. Arce stresses other contri- bution aggregators, including weakest link, weaker link, best shot, and better shot, which have counterparts in terms of scenarios involving biodiversity protection. Most important, the underlying game associated with each of these contribution aggregators is not the prisoner’s dilemma, thus holding out greater promise of collective action. The author applies evolutionary game theory—in terms of the evolutionary stable strategy—to investigate whether individual agents can achieve greater cooperative outcomes. Given its focus on population dynamics, evolutionary

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