On Trade and the Stability of (Armed) Peace

Michelle Garfinkel and Constantinos Syropoulos ()

No 181910, Working Papers from University of California-Irvine, Department of Economics

Abstract: We consider an environment in which two sovereign states with overlapping ownership claims on a resource/asset first arm and then choose whether to resolve their dispute violently through war or peacefully through settlement. Both approaches depend on the states' military capacities, but have very different outcomes. War precludes trade between the two states and can be destructive; however, once a winner is declared, arming is unnecessary in future periods. By contrast, a peaceful resolution under the threat of war today avoids destruction and supports mutually advantageous trade; yet, settlements must be renegotiated and the states must arm in future periods to resolve their ongoing dispute. Paying special attention to the importance of trade on arming incentives and payoffs in this context, we explore the conditions under which "armed peace" arises as the perfectly coalition-proof equilibrium over time. Our analysis reveals that, depending on the destructiveness of war, time preferences, and the distribution of initial resource endowments, greater gains from trade (jointly determined by trade costs and the substitutability of traded commodities) can reduce arming and pacify international tensions. Even when the gains from trade are relatively small, peace might be sustainable, but only for more uneven distributions of initial resources.

Keywords: Interstate disputes; Conflict and settlement; Security policies; Gains from trade (search for similar items in EconPapers)
JEL-codes: C72 C78 D30 D70 D74 F10 F51 F60 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2019-06
New Economics Papers: this item is included in nep-int and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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