© 2015 University of Venice. We explore the severity of an ongoing dispute over a productive resource within a country that participates in world trade. In addition to arming, the contending groups in our setting choose either to engage in destructive conflict or to settle their dispute peacefully. Our central objective is to characterize the conditions under which the dispute might be resolved peacefully instead of violently. The analysis underscores the intuitive roles played by the destructiveness of open conflict and the salience of the future that have been identified in the previous literature, but it also provides some novel insights into how world prices and trade openness matter. Among other things, we find that, given conflict's destructive effects and time preferences, settlement is most likely to be supported as a stable equilibrium when the "traditional" gains from trade are largest. However, there also exist circumstances under which increased trade openness can induce destructive conflict.

This paper analyzes a guns-versus-butter model in which two agents compete for control over an insecure portion of their combined output. They can resolve this dispute either peacefully through settlement or by military force through open conflict (war). Both types of conflict resolution depend on the agents’ arming choices, but only war is destructive. We find that, insofar as entering into binding contracts on arms is not possible and agents must arm even under settlement to secure a bigger share of the contested output, the absence of long-term commitments need not be essential in understanding the outbreak of destructive war. Instead, the ability to make short-term commitments could induce war. More generally, our analysis highlights how the pattern of war’s destructive effects, the degree of output insecurity and the initial distribution of resources matter for arming decisions and the choice between peace and war. We also explore the implications of transfers for peace.

In this paper, we study alternative forms of conflict resolution, both peaceful and non-peaceful, between two countries that compete for claims to a resource used to produce potentially traded goods. Consistent with the classical liberal argument, peace supports mutually beneficial trade, whereas war preempts it. War always induces countries to allocate resources into non-contractible arming ("guns") for superiority in conflict. Under peaceful settlement, countries might choose to arm as well for gaining leverage in negotiations, but arming is typically less than what it is under war. Building on the observation that arming itself affects the countries' bargaining sets, we compare the efficiency properties of division rules generated by three prominent bargaining solutions - namely, splitting the surplus, equal sacrifice, and Nash bargaining - and show how they depend on the gains from trade.

On the basis of a single-period, guns-versus-butter, complete-information model in which two agents dispute control over an insecure portion of their combined output, we study the choice between a peace agreement that maintains the status quo without arming (or unarmed peace) and open conflict (or war) that is possibly destructive. With a focus on outcomes that are immune to both unilateral deviations and coalitional deviations, we find that, depending on war's destructive effects, the degree of output security and the initial distribution of resources, peace can, but need not necessarily, emerge in equilibrium. We also find that, ex ante resource transfers without commitments can improve the prospects for peace, but only when the configuration of parameters describing the degree of output security and the degree of war's destruction ensures the possibility of peace without such transfers at least for some sufficiently even initial resource distributions.

We analyze a dynamic, two-country model that highlights the various trade-offs each country faces between current consumption and competing investments in its future productive and military capacities as it prepares for a possible conflict in the future. Our focus is on the circumstances under which the effects of current trade between the two countries on the future balance of power render trade unappealing to one of them. We find that a positive probability of future conflict induces the country with less resource wealth to “prey” on the relatively more “prudent” behavior of its larger rival, and more so as conflict becomes more likely. While a shift from autarky to trade always raises the current incomes of both countries, the smaller country realizes the relatively larger income gain from trade and also devotes a relatively larger share of its income gain towards arming. Our analysis shows that the larger country rationally chooses not to trade today when the difference in initial resource wealth is sufficiently large and is more likely to prefer autarky when the probability of future conflict is higher.

We construct a model of conflict and trade to study the consequences of interstate disputes over contested resources (land, oil, water or other resources) for arming, welfare and trade flows. Different trade regimes imply different costs of such disputes in terms of arming. Depending on world prices, free trade can intensify arming to such an extent that the additional security costs it brings swamp the traditional gains from trade and thus render autarky more desirable for one or all rival states. Free trade, though, is always an equilibrium, and sometimes is a dominant one with features of a prisoner's dilemma outcome. Furthermore, contestation of resources can reverse a country's apparent comparative advantage relative to its comparative advantage in the absence of conflict. And, where such conflict is present, comparisons of autarkic prices to world prices could be inaccurate predictors of trade patterns.

We analyze how trade openness matters for interstate conflict over productive resources. Our analysis features a terms-of-trade channel that makes security policies trade-regime dependent. Specifically, trade between two adversaries reduces each one's incentive to arm given the opponent's arming. If these countries have a sufficiently similar mix of initial resource endowments, greater trade openness brings with it a reduction in resources diverted to conflict and thus wasted, as well as the familiar gains from trade. Although a move to trade can otherwise induce greater arming by one country and thus need not be welfare improving for both, aggregate arming falls. By contrast, when the two adversaries do not trade with each other but instead trade with a third (friendly) country, a move from autarky to trade intensifies conflict between the two adversaries, inducing greater arming. With data from the years surrounding the end of the Cold War, we exploit the contrasting implications of trade costs between enemies versus trade costs between friends to provide some suggestive evidence in support of the theory.