Economics of Conflict: An Overview

In this chapter, we review the recent literature on conflict and appropriation. Allowing for the possibility of conflict, which amounts to recognizing the possibility that property rights are not perfectly and costlessly enforced, represents a significant departure from the traditional paradigm of economics. The research we emphasize, however, takes an economic perspective. Specifically, it applies conventional optimization techniques and game-theoretic tools to study the allocation of resources among competing activities— productive and otherwise appropriative, such as grabbing the product and wealth of others as well as defending one’s own product and wealth. In contrast to other economic activities in which inputs are combined cooperatively through production functions, the inputs to appropriation are combined adversarially through technologies of conflict. A central objective of this research is to identify the effects of conflict on economic outcomes: the determinants of the distribution of output (or power) and how an individual party’s share can be inversely related to its marginal productivity; when settlement in the shadow of conflict and when open conflict can be expected to occur, with longer time horizons capable of inducing conflict instead of settlement; how conflict and appropriation can reduce the appeal of trade; the determinants of alliance formation and the importance of intra-alliance commitments; how dynamic incentives for capital accumulation and innovation are distorted in the presence of conflict; and the role of governance in conflict management.