Post on 12-Nov-2014
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War Signals:A Theory of Trade, Trust and Con�ict
Dominic Rohner (University of Lausanne) Mathias Thoenig(University of Lausanne) Fabrizio Zilibotti (University of Zurich)
Estonian Economic Association 2014
January 31, 2014
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Introduction
Recurrent Wars
In 1950-2000, over two third of civil con�icts are "recurrent"
Determinants of civil wars: "Greed" vs. "Grievance"
Greed : cost/bene�t analysis in presence of weak institutions,natural resource contest, etc.Grievance: fanaticism, revenge, irrationality of crowds. . .
Persistence in such factors can explain recurrence
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Introduction
This paper
A rational choice theory of trust, trade and warwhere "distrust" is at the root of recurrent con�icts
War today hinders inter-ethnic trustDistrust reduces trade opportunitiesand the opportunity cost of future war fallsThis leads to recurrent war
Distrust may be "unwarranted"...without necessarily being irrational
Culprit: imperfect information / learning trap(related to information cascades)
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Introduction
Institutions vs. Social Capital
Recent economic theories emphasize institutions
A number of developing countries with relativelysolid institutions plunge into recurrent con�icts,
Colombia, India, Turkey, Sri Lanka and the Philippines(WVS score 0.16)
... whereas other countries with weak institutions and highethnic cleavages experienced no civil con�icts:
Bhutan, Cameroon, Gabon, Kazahstan,Togo, China and Vietnam (WVS score 0.51)
Institutions do not appear to be the sole determinants of civil war
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Introduction
War Persistence and E¤ect of Lagged Trust
LHS: civil war incidence (5-years period, annual in col. 7-8)
(1) (2) (3) (4) (5) (6) (7) (8)
War (t1) 0.36*** 0.22*** 0.30*** 0.17*** 0.24*** 0.10 0.24*** 0.05
(0.01) (0.01) (0.02) (0.014) (0.04) (0.07) (0.02) (0.04)
Trust (t1) 0.37* 0.56*** 0.48*** 0.46***
(0.21) (0.20) (0.08) (0.17)
Conflicts coded as war >25 Fatal. >1000 Fatal. >25 Fatal. >1000 Fatal. >25 Fatal. >1000 Fatal. >25 Fatal. >1000 Fatal.
Controls No No Yes Yes Yes Yes Yes Yes
Observations 1426 1426 1026 939 101 101 564 439
Pseudo Rsquared 0.304 0.322 0.363 0.358 0.575 0.572 0.695 0.597
Dependent variable: Civil war incidence (fiveyear intervals). The dependent variable is coded as 1 if a conflict causing at least 25 (1000) fatalities is recorded
in at least one of the five years. Sample period: 19492008. Number of countries for which observations are available: 174. The set of controls include:
lagged democracy, lagged GDP per capita, oil exporter, lagged population, ethnic fractionalization, mountainous terrain, noncontiguous state, region fixed
effects and time dummies. Columns 78 have as dependent variable civil war incidence at the annual level (details in the text). The table reports the marginal
effects of logit regressions with robust standard errors, clustered at the country level. Significance levels: * p<0.1, ** p<0.05, *** p<0.01.
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Introduction
War Persistence and E¤ect of Lagged Trust
Controls:
democracy: often insigni�cant, negative and signif. in column 6log GDP[-1]: usually negative, sometimes insigni�cantethnic fractionalization: positive and often signi�cantoil exporter: usually insigni�cantmountainous terrain: positive and often signi�cant
See, e.g., Fearon and Laitin (2003), Collier and Hoe er (2004),Montalvo and Reynal-Querol (2005), Cederman and Girardin(2007), Collier and Rohner (2008), and Esteban et al. (2012).
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Introduction
Causal Impact of War on Trust: Uganda
Rohner, Thoenig and Zilibotti (2011):
"Seeds of Distrust: Con�ict in Uganda"
Highly fractionalized country (52 groups)
Endemic ethnic con�icts
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Introduction
Causal Impact of War on Trust: Uganda (cont.)
Exogenous change in the intensityof counter-insurgency after 9/11
Explosion of violence in 2002-04ending with defeat of main rebel movements
We exploit geolocalized information on con�ict events (ACLED);we know where ethnic violence took placeand which ethnic groups it involved
"Pre" and "Post" district-level survey measuresof trust and ethnic identity (Afrobarometer)
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Introduction
Causal Impact of War on Trust: Uganda (cont.)
13
2000 2008
End of 2001:US Patriot Act declaresLRA and ADF to be
Terrorists(+end of Congo War)
2002:Museveni starts
“Operation Iron Fist”
2002 2004:Escalation of violence
by rebels andgovernment
2005:ADF defeated,LRA weakened
2006:Ceasefire,
less fighting
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Introduction
Causal Impact of War on Trust: Uganda (cont.)
Main �ndings:
Intensity of violence at the county and/or ethnic leveldecreases trust towards other Ugandansand increases ethnic identityIntensity of violence at the district/ethnic leveldecreases post-con�ict economic cooperationin ethnically fractionalized areas
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Introduction
Trade, Trust and Con�ict
Trade reduces the likelihood of con�ict:
Martin, Meyer & Thoenig (ReSTud 08; JEEA 08)India and East Asia: Horowitz (2000), Jha (2008),Varshney (2001, 2002), Bardhan (1997)Rwanda: Ingelaere (2007), Pinchotti and Verwimp (2007)
Trade and economic cooperation hinges on trustand perceived trustworthyness:
Inter-ctry evidence (Guiso, Sapienza & Zingales QJE 09,Felbermayr & Toubal EER 10)Social/trade networks help enforcement ofreputation and retaliation (Rauch JIE 99, Greif JPE 94)
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Introduction
Road map
Static model
Perfect InformationImperfect information
Dynamics
War traps
Extensions
Altruism (Markov Perfect Equilibrium)Stochastic typesPeace trapsLearning from trade
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Theory
The Two-Stage Game
A continuum of risk-neutral individuals belonging totwo "ethnic" groups (A and B), each of unit mass
Between-groups interactions are described by a two-stage game:
S1 Group A decides whether or not to wage war against group BS2 (WAR) No economically interesting decisions
(payo¤ of war to group A is equal to V )S2 (PEACE) Each agent in group A is randomly matched
to trade with an agent in group B
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Theory
S2: Economic Payo¤ of Trade (stag hunt game)
Group B
C D
C c, c h� l , hGroup A
D h, h� l h, h
where c > h
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Theory
Interpretation
Interpretation(s):1 Defection as opportunistic ("dishonest") behavior(Hauk and Saez Marti JET 02; Tabellini QJE 08)
2 Human capital investment
1 A "successful" partnership requires a costly (l) human capitalinvestment, e.g., familiarizing oneself with the other group�slanguage and customs
2 Cooperation=invest; defection=not invest3 In line with the classic stag-hunt game
In either interpretation, cooperation is risky (if the other sidedefects, the cooperator neither hunts the stag nor the rabbit)
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Theory
S2: Economic + Psychological payo¤ of trade
Group B
C D
C c + ιA,i , c + ιB ,j h� l + ιA,i , hGroup A
D h, h� l + ιB ,j h, h
where c > h
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Theory
S2: Distribution of "Cooperative Spirit"
We assume ι to be a continuous random variable,i .i .d . across agents, drawn from a distributionwith c.d.f. F J : R ! [0, 1]
Group A can be of two types: FA 2 fF+,F�g,where F+ �rst-order stochastically dominates F�
Group A is civic (trustworthy) if FA = F+,and is uncivic if FA = F�
FB has a unique realization (for tractability)
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Theory
S2: Cooperation in Trade
The optimal strategy (C vs. D) depends on theproportion of cooperators in the other population
Let z � c � (h� l)Cooperation is chosen by all agents in group A for whom
ιA � l � z � nB ,
where nB is the proportion of cooperators in group B
Cooperation is chosen by all agents in group B for whom
ιB � l � z � nA.
where nA is the of proportion cooperators in group A
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Theory
S2: Trade Surplus
Trade surplus accruing to group A and B
SkA = h+ znkAnkB �
Z ∞
l�z �nkB(l � ι) � dF k (ι)
SkB = h+ znkAnkB �
Z ∞
l�z �nkA(l � ι) � dF k (ι)
where k 2 f+,�g denotes group A�s typeWithin-group transfers rule out (within-group) ine¢ ciencies
Note: S+A � S�A and S+B � S
�B
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Theory
S1: Stochastic war
War has a stochastic pay o¤
Motivation: good and bad times to make war...
Discrete support, V 2 fVH ,V ,V Lg such thatif V = V H
�V = V L
�war (peace) is always optimal
We call these states war shocks and peace shocksThe associated probabilities are λW and λP
If V = V war or peace may be chosen depending on theeconomic surplus. We call this state "business as usual" (BAU)
If Sk > V group A chooses peace under BAUIf Sk < V group A chooses war under BAU
The realization of V is observed before war decision
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Theory
Perfect Information (benchmark)
Multiple equilibria in general possible
Under some conditions on distributions, we prove that
the Nash equilibrium of the trade game is uniqueif k = +, group A keeps peace under BAUif k = �, group A wages war under BAU
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Theory
Imperfect information
Assume group B does not observe:1 group A�s type2 the realization of V
Characterize the PBE
Solve the game backwards
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Theory
Imperfect information (trade)
Let πP denotes the posterior belief(after peace) that A is civicGroup A: invest if
ιA,i � l � z � nB ) nkA = Fk (znB )
Group B: invest if
ιB ,i � z �E [nA j πP ]) nB = FB�
πP � zn+A +�1� πP
�� zn�A
�Fixed point yields:
nB = nB
+
πP
!, n+A = n
+A
+
πP
!, n�A = n
�A
+
πP
!
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Theory
Imperfect information (surplus)
Surplus of group A (relevant for war waging decision)
Sk +
πP
!= h+ znkA
�πP�nB�
πP��Z ∞
l�z �nB (p)(l � ι) �dF k (ι)
Note: due to strategic complementarity, pessimistic beliefs yielda collapse of trade surplus irrespective of the true type
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Theory
Imperfect information (group A�s trade surplus)
Figure: V is pay-o¤ of war under BAU. For πP < π�, group A wages war(under BAU) irrespective of its type. For πP � π�, group A does notwage war (under BAU) if it is of the civic type
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Dynamics
Bayesian updating
Young agents acquire beliefs based on warfare history
transmission of private info within "dynasties" in an extension
Posterior beliefs at t are prior beliefs at t+1, etc.
In the "informative" region (of priors)
After peace:�πPt =
�πt+1 > πt
After war: πt+1 < πt
In the "uninformative" region:
πt+1 = πt no matter what
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Dynamics
Dynamic equilibrium
Let rt = πt1�πt
(likelihood ratio, r 2 (0,∞))
Trapwar peace
r
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Dynamics
Dynamic equilibrium (cont.)
In the informative equilibrium region,beliefs follow an asymmetric random walk with drift
ln rt =
8>><>>:ln rt�1 + ln
�1�λW
λP
�if Peace
ln rt�1 � ln�1�λP
λW
�if War
Pr (WAR) =
8<:1� λP if k=-
λW if k=+
In the war trap
ln rt = ln rt�1Pr (WAR) = 1� λP
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Dynamics
Dynamic equilibrium (cont.)
ln tr
ln r 1ln tr −
war
peace
Nonrecurrentstates
ln1
W
P
rλλ−
45°
Figure: Dynamics of beliefs
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Dynamics
"Unwarranted" war traps
Suppose group A is civic (k=+)... but B does not know it
Yet, a sequence of low-probability war shockscan drive the economy into a (permanent) war trap
Trap
War shock
r
War shockWar shock
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Dynamics
Dynamic equilibrium (cont.)
In the long run, the economy can fall into the trap
... but can as well, alternatively, escape the trap forever
If A is civic, the process is a random walk with positive drift,and the drift pushes the economy away of the "slippery" region
We characterize the prob. distribution over long-run outcomes
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Dynamics
Proposition
Assume that V > S+ (0) , S� (∞) < V < S+ (∞) , and r0 > r .(i) If group A is uncivic,then the DSE enters the war trap in �nite time with probability one.(ii) If group A is civic,then the DSE enters the war trap in �nite time w. prob. PTRAP > 0,and stays out of the war trap forever with prob. 1�PTRAP > 0.If the economy stays out of the trap, the DSE converges to perfectlearning, i.e., rt ! ∞, and war incidence stays low ( λW ).(iii) The probability PTRAP has the following bounds:
0 <λW1� λP
rr0< PTRAP �
rr0< 1.
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Dynamics
Proof (sketch)
The proof is based on the Martingale Convergence Theorem:πt converges almost surely to a limit
It is easy to prove that the limit cannot liein the interior of the informative region,thus either πt enters the trap or limt!∞ πt = 1
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Dynamics
Proof (sketch)
Suppose A is uncivicThen, limt!∞ πt = 1 induces a contradiction(i.e., the economy converges to a war trap with prob. one)
Suppose limt!∞ πt = 1, thenthe economy must remain forever in the informative regionBut, then, the Law of Large Numbers would imply that B couldobserve an in�nite no. of realizations of the war/peace process,and eventually learn the truth, i.e., that A is uncivicA contradiction
Suppose A is civicThen, group B can learn asymptotically the truth (i.e.,limt!∞ πt = 1) with positive probabilityHowever, a �nite no. of war shocks precipitates the economyinto the war trap. This happens with positive probability(since it takes a �nite no. of steps to enter the traps)
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Dynamics
Taking stock
In summary, supposing A is civic:
With a positive probabilitythe economy converges to perfect (correct) learningWith a positive probability the economy stops learningWe can provide bounds to theprobability that the economy falls into the trap
Economic development hinges on luck, i.e.,the realization of the stochastic process of peace/war(similar to Acemoglu and Zilibotti JPE 1997).
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Extensions
Extensions
Altruistic agents:
Internalize the negative e¤ect of war on future generationsCharacterize the Markov equilibrium of the dynamic game
Stochastic types
With a positive probability group A�s type changes(Markov switching probability)
Peace trap together with war traps
Learning from trade
Traders acquire some private information aboutthe other group�s type
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Extensions
Stochastic types
Cultural shocks drive shifts of group A�s type(e.g., ancient Vikings vs modern Scandinavians)
As time goes by the discredit of group B washes away
Can war traps be averted?
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Extensions
Stochastic types (cont.)
Two-state Markov chain:
k + �
+ 1� θ θ
� φ 1� φ
φ � 1/2 and θ � 1/2, implying a positive autocorrelationThe unconditional (long run) likelihood ratiothat A is civic is r = φ/θ
The type shock is realized at thebeginning of each period, before war decision
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Extensions
Stochastic types (cont.)
Posterior at t now di¤ers from prior at t+1Bayes rule yields
r (rt�1) =(1� θ)rt�1 + φ
θrt�1 + 1� φ
In the informative region, after war and peace
rt =
8><>:r (rt�1)� 1�λW
λPif peace
r (rt�1)� λW1�λP
if war
In uninformative region (irrespective of war/peace)
rt = r (rt�1) =(1� θ)rt�1 + φ
θrt�1 + 1� φ
Three possibilitiesWar Signals (Estonian Economic Association 2014) War Signals January 31, 2014 39 / 50
Extensions
Stochastic types (cont.)
r(t)
r(t+1)
r(t)
CASE 1: TRAP
uninformativeregion
informativeregion
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Extensions
Stochastic types (cont.)
r(t)
r(t+1)
r(t)
uninf.region
informativeregion
CASE 2: NO TRAP
ergodic set
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Extensions
Stochastic types (cont.)
r(t)
r(t+1)
r(t)
uninform.region
informativeregion
CASE 3: CYCLES
ergodic set
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Extensions
Peace Traps
Figure: Surplus from trade and war bene�ts; the case of two traps.
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Extensions
Peace Traps
ln tr
ln r 1ln tr −
war
peace
Nonrecurrentstates
ln rln1
W
P
rλλ−
*ln r
Nonrecurrentstates
45°
Figure: Dynamics of beliefs with two trapsWar Signals (Estonian Economic Association 2014) War Signals January 31, 2014 44 / 50
Extensions
Learning from trade
Agents can acquire and retain some informationthrough their individual family trade history
Simplifying assumption:as soon as an agent trade, she observes the true k
This "hard" information is transmitted to the o¤spring
Without additional assumptions,all agents would learn perfectly k over time.
We assume that the inter-generational transmission of"hard" information is imperfect: with probability θ, thechild of an informed parent fails to receive the information.
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Extensions
Learning from trade
Suppose the proportion of informed players is exogenousInformed players reduce the scope of learning traps
Figure: Trade surplus with di¤erent proportion of informed players, ι.
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Extensions
Learning from trade
Suppose k=+ and ι is endogenous
Now, peace periods have the additional virtuethat some people "learn through trade"
However, during war, there is no direct learning,and in fact some information from past trade gets lost
More formally,
ιt+1 = (1� θ)[ιt + (1�Wt)� τ � (1� ιt)]
Result no. 1:
For large enough θ a war trap continue to exist
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Extensions
Learning from trade
Result no. 2:
Cycles are a generic feature of the equilibrium:
the economy enters the uninformative region,where war is frequent and trade is scantwars make fall the economy "deeper"into the uninformative regionhowever, a sequence of peace shocks(by inducing trade and learning) can rescue the economy
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Conclusions
Conclusions
A rational theory of persistent (ine¢ cient) wars
Business relations are key to preserve stable peace
Peace-keeping forces can be ine¢ cient when trust has collapsed,since they fail to restore trade and economic cooperation(consistent with the empirical evidence)
Policies aimed to restore trade and trust are more promising
positive campaigns aboutsuccessful inter-ethnic business partnershipstargeted human capital subsidies reducing the cost of tradingwith the other groups (e.g., learning languages, customs)changes in social norms (persuasion campaign?)
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Conclusions
In progress
Limitation (common in the literature):con�ict as a two-group game
Yet, in many con�icts there are complicated network of alliances
Complementarity, substitution and externalitiesin �ghting and sharing the "prize"
Work in progress with M. Koenig, D. Rohner, and M. Thoenig
contest success function (Tullock game)an explicit network of alliances and rivalriesNash equilibrium)e¤ort depends on groups�centralitystructural estimation based on Congo (DRC) warpolicy: key player analysis
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