War Signals: A Theory of Trade, Trust and Conflict
By: Dominic Rohner with Mathias Thoenig and Fabrizio Zilibotti
Review of Economic Studies, 80 (3), 1114-1147, 2013.
We construct a dynamic theory of civil conflict between two groups hinging on cross-community beliefs (trust) and economic relationships (trade). Trade necessitates imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict 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, and transmit them to the next generation. The theory bears some testable predictions. First, along the equilibrium path, 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, a sequence of "accidental" conflicts can lead to the permanent breakdown of trust, plunging a society into a state of recurrent con‡icts (a war trap). Fourth, the incidence of conflict can be reduced by policies abating cultural barriers, fostering human capital and targeting beliefs. Coercitive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.