A game-theoretic analysis of international trade and political conflict over external territories
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For analyzing conflict between two large open countries over external territories rich in natural resources, we develop a game-theoretic model of trade under resource appropriation possibilities. We show that greater trade openness (by lowering trade costs) reduces the overall intensity of arming when the adversary countries are symmetric in all dimensions. This finding is consistent with the liberal peace hypothesis that trade reduces conflict. We further analyze how equilibrium is affected by differences in national resource endowments. The resulting asymmetric equilibrium reveals that arming by the more endowed country exceeds that of the less endowed country and the two adversaries respond to lower trade costs differently: the more endowed country cuts back on its arming, whereas the less endowed country may increase it. Under resource endowment asymmetry, the aggregate arming allocations of the adversaries could increase despite greater trade openness.
KeywordsDisputes over external territories Trade openness Conflict intensity
JEL ClassificationD30 D74 F10 F51 F52
We are indebted to William F. Shughart II, the Editor in Chief, and two anonymous reviewers for insightful comments and valuable suggestions, which have significantly improved the paper. An earlier version of this paper was presented in the conflict/security sessions at the International Conference on Game Theory, Stony Brook University, July 17–21, 2017. We acknowledge helpful comments from the session organizers Timothy Mathews, Shane Sanders, as well as conference participants. All remaining errors are ours.
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