Productivity Shocks and Conflict

Biljana Meiske

Working Papers from Max Planck Institute for Tax Law and Public Finance

Abstract: This paper studies the consequences of productivity shocks on conflict behavior in the presence of loss aversion. In a first step, I incorporate expectation based loss preferences `a la KË oszegi and Rabin (2006, 2007) into a Hirshleifer-Skaperdas conflict game and show that negative productivity shocks entail larger conflict investments if agents are loss averse (and smaller investments if agents are gain-seeking); the reverse holds in case of a positive productivity shock. In a second step, a lab experiment (N=496) was conducted with participants playing repeated guns-and-butter conflict game under changing productivity regimes. The experimental results reveal that while negative productivity shocks (channeled through loss aversion) have the predicted effects, positive productivity shocks lead to the predicted increase in conflict investment among gain-seeking, but fail to reduce conflict investment among loss-averse participants. Furthermore, absent any changes in productivity level, conflict investments are shown to increase in the level of loss aversion.

Keywords: conflict; rent-seeking; loss; aversion; reference; dependence; productivity; shocks (search for similar items in EconPapers)
JEL-codes: C92 D72 D74 D91 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2021-11
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-gth and nep-upt
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