Side-Payments and the Costs of Conflict

Kimbrough, Erik and Sheremeta, Roman (2013): Side-Payments and the Costs of Conflict. Published in: International Journal of Industrial Organization No. 31 (2013): pp. 278-286.

Abstract

Conflict and competition often impose costs on both winners and losers, and conflicting parties may prefer to resolve the dispute before it occurs. The equilibrium of a conflict game with side-payments predicts that with binding offers, proposers make and responders accept side-payments, generating settlements that strongly favor proposers. When side-payments are non-binding, proposers offer nothing and conflicts always arise. Laboratory experiments confirm that binding side-payments reduce conflicts. However, 30% of responders reject binding offers, and offers are more egalitarian than predicted. Surprisingly, non-binding side-payments also improve efficiency, although less than binding. With binding side-payments, 87% of efficiency gains come from avoided conflicts. However, with non-binding side-payments, only 39% of gains come from avoided conflicts and 61% from reduced conflict expenditures.

• Item Type: MPRA Paper
• Language: English
• Keywords: contests, conflict resolution, side-payments, experiments
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior

References

Abbink, Klaus. 2004. “Staff Rotation as an Anti-corruption Policy: an Experimental Study.” European Journal of Political Economy, 20: 887-906.

Abbink, Klaus, Bernd Irlenbusch, and Elke Renner. 2002. “An Experimental Bribery Game.” Journal of Law, Economics and Organization, 18(2): 428-454.

Anbarci, Nejat, Stergios Skaperdas, and Constantinos Syropoulos. 2002. “Comparing Bargaining Solutions in the Shadow of Conflict: How Norms Against Threats Can Have Real Effects.” Journal of Economic Theory, 106(1): 1-16.

Baye, Michael R. and Heidrun C. Hoppe. 2003. “Strategic Equivalence of Rent-Seeking, Innovation, and Patent-Race Games.” Games and Economic Behavior, 44, 217-226.

Bebchuk, Lucian A. 1984. “Litigation and Settlement under Imperfect Information.” RAND Journal of Economics, 15: 404-415.

Büchner, Susanne, Andreas Freytag, Luis Gonzalez, and Werner Güth. 2008. “Bribery and Public Procurement - An Experimental Study.” Public Choice, 137: 103-117.

Charness, Gary, Guillame R. Frechette, and Cheng-Zong Qin. 2007. “Endogenous Transfers in the Prisoner's Dilemma Game: An Experimental Test of Cooperation and Coordination.” Games and Economic Behavior, 60(2): 287-306.

Davis, Douglas and Charles A. Holt, 1993. Experimental Economics. Princeton, NJ: Princeton University Press.

Davis, Douglas and Robert Reilly. 1998. Do Many Cooks Always Spoil the Stew? An Experimental Analysis of Rent Seeking and the Role of a Strategic Buyer.” Public Choice, 95: 89-115.

Eriksson, Tor, Sabrina Teyssier, and Marie-Claire Villeval. 2009. “Self-selection and the Efficiency of Tournaments.” Economic Inquiry, 47(3): 530-548.

Esteban, Joan M. and József Sákovics, 2008. "A Theory of Agreements in the Shadow of Conflict: The Genesis of Bargaining Power," Theory and Decision, 65(3), 227-252.

Fischbacher, Urs. 2007. “z-Tree: Zurich Toolbox for Ready-made Economic Experiments.” Experimental Economics, 10(2): 171-178.

Fudenberg, D., R. Gilbert, J. Stiglitz, and J. Tirole. 1983. “Preemption, Leapfrogging, and Competition in Patent Races,” European Economic Review, 22, 3-31.

Garfinkel, Michelle. R. and Stergios Skaperdas. 2000. “Conflict without Misperceptions or Incomplete Information - How the Future Matters.” Journal of Conflict Resolution, 44(6), 793-807.

Garfinkel, Michelle. R. And Stergios Skaperdas. 2007. “Economics of Conflict: An Overview” in Handbook of Defense Economics, ed. Todd Sandler and Keith Hartley, 649-710. New York, NY: Elsevier.

Gilbert, Richard J & Newbery, David M G, 1982. “Preemptive Patenting and the Persistence of Monopoly," American Economic Review, 72(3), 514-26,

Green, Edward J & Porter, Robert H, 1984. "Noncooperative Collusion under Imperfect Price Information," Econometrica, 52(1), 87-100.

Grossman, Sanford J & Hart, Oliver D, 1983. “An Analysis of the Principal-Agent Problem," Econometrica, 51(1), 7-45,

Guth, Werner and Reinhald Tietz. 1990. “Ultimatum Bargaining Behavior: A Survey and Comparison of Experimental Results.” Journal of Economic Psychology, 11(3): 417-449.

Hirshleifer, Jack. 1995. “Theorizing about Conflict” in Handbook of Defense Economics, ed. Todd Sandler and Keith Hartley, 165-190. New York, NY: Elsevier.

Hoffman, Elizabeth and Matthew Spitzer. 1985. “Entitlements, Rights, and Fairness: an Experimental Examination of Subjects’ Concepts of Distributive Justice.” Journal of Legal Studies, 15: 254–297.

Hoffman, Elizabeth, Kevin McCabe, Keith Shachat, and Vernon Smith. 1994. “Preferences, Property Rights, and Anonymity in Bargaining Games.” Games and Economic Behavior 7: 34–380.

Jackson, Matthew. O. and Simon Wilkie. 2005. “Endogenous Games and Mechanisms: Side Payments among Players.” Review of Economic Studies, 72(2): 543-566.

Jehiel, Phillipe and Benny Moldovanu. 1996. “Strategic Nonparticipation.” RAND Journal of Economics, 27(1): 84-98.

Kahn, Lawrence M. and J. Keith Murnighan. 2008. “Payoff Uncertainty and Cooperation in Finitely-Repeated Prisoner’s Dilemma Games,” in Handbook of Experimental Economics Results, Vol. 1, ed. Charles R. Plott and Vernon L. Smith, 598-606. New York, NY: Elsevier.

Kaplan, Steven N and Per Stromberg. 2003. “Financial contracting theory meets the real world: An empirical analysis of venture capital contracts." Review of Economic Studies, 70, 281-315.

Konrad, Kai. A. 2009. Strategy and Dynamics in Contests. New York, NY: Oxford University Press.

Lazear, Edward P. and Sherwin Rosen. 1981. “Rank-Order Tournaments as Optimum Labor Contracts.” Journal of Political Economy, 89(5): 841-864.

Lee, Jinkwon. 2007. "Repetition And Financial Incentives In Economics Experiments," Journal of Economic Surveys, 21(3), 628-681.

Leibowitz, Jon. 2009. “Pay-for-Delay Settlements in the Pharmaceutical Industry: How Congress Can Stop Anticompetitive Conduct, Protect Consumers’ Wallets, and Help Pay for Health Care Reform,” Federal Trade Commission, speech given at the Center for American Progress. URL: http://www.ftc.gov/speeches/leibowitz/090623payfordelayspeech.pdf

Lin, Ping. 1996. “Fixed-Fee Licensing of Innovations and Collusion,” Journal of Industrial Economics, 44(4), 443-449.

Linster, Bruce G. 1994. “Cooperative Rent-Seeking.” Public Choice, 81: 23-34.

McCabe, Kevin A., Mary L. Rigdon, and Vernon L. Smith. 2007. “Sustaining Cooperation in Trust Games,” Economic Journal, 117(522): 991-1007.

Mitka, Mike. 2011. “Capitol Health Call: Delay for Generics.” Journal of the American Medical Association, 305(10): 987.

Modolvanu, Benny and Aner Sela. 2001. “The Optimal Allocation of Prizes in Contests.” American Economic Review, 91(3): 542-558.

Murnighan, J. Keith. 2008. “Fairness in Ultimatum Bargaining,” in Handbook of Experimental Economics Results, Vol. 1, ed. Charles R. Plott and Vernon L. Smith, 436-453. New York, NY: Elsevier.

Muthoo, Abhinay. 2004. “A Model of the Origins of Basic Property Rights.” Games and Economic Behavior, 49(2): 288-312.

O’Keeffe, Mary, W. Kip Viscusi and Richard J. Zeckhauser. 1984. “Economic Contests: Comparative Reward Schemes.” Journal of Labor Economics, 2(1): 27-56.

Parker, G.A. 1974. “Assessment Strategy and the Evolution of Fighting Behavior.” Journal of Theoretical Biology, 47(1): 223-243.

Porter, Robert H. 2005. “Detecting Collusion,” Review of Industrial Organization, 26, 147-167.

Potters, Jan C. Casper G. De Vries, and Frans Van Linden. 1998. “An Experimental Examination of Rational Rent Seeking.” European Journal of Political Economy, 14: 783-800.

Price, Curtis R. and Roman M. Sheremeta, 2011. “Endowment Effects in Contests.” Economics Letters, 111, 217–219.

R Development Core Team. (2010) R: A language and environment for statistical computing. Vienna: R foundation for statistical computing. http://www.R-project.org

Schechter, Laura. 2007. “Theft, Gift-giving, and Trustworthiness: Honesty Is Its Own Reward in Rural Paraguay.” American Economic Review, 97(5): 1560-1582.

Schmalensee, Richard. 1987. “Competitive Advantage and Collusive Optima.” International Journal of Industrial Organization, 5, 351-367.

Schoonbeek, Lambeert. 2009. “Bribing Potential Entrants in a Rent-Seeking Contest,” Public Choice, 139(1-2), 153-158.

Schweizer, U. 1989. “Litigation and Settlement under Two-Sided Incomplete Information.” Review of Economic Studies, 56(1): 163-178.

Scott, David W. 1992. Multivariate Density Estimation: Theory, Practice, and Visualization. New York, NY: Wiley.

Sheremeta, Roman M. 2011. “Contest Design: An Experimental Investigation.” Economic Inquiry. 49 (2): 573–590.

Sheremeta, Roman M. 2010a. “Expenditures and Information Disclosure in Two-Stage Political Contests.” Journal of Conflict Resolution, 54: 771-798.

Sheremeta, Roman M. 2010b. “Experimental Comparison of Multi-Stage and One-Stage Contests.” Games and Economic Behavior, 68(2): 731-747.

Sheremeta, Roman. M. and JingJing Zhang. 2010. “Can Groups Solve the Problem of Over-Bidding in Contests?” Social Choice and Welfare, 35(2): 175-197.

Shubik, Martin. 1971. “The Dollar Auction Game: A Paradox in Non-Cooperative Behavior and Escalation.” Journal of Conflict Resolution, 15(1): 109-111.

Silipo, D.B. 2005. “The Evolution of Cooperation in Patent Races: Theory and Experimental Evidence,” Journal of Economics, 85, 1-38.

Skaperdas, Stergios. 1996. “Contest Success Functions,” Economic Theory, 7(2), 283-290.

Skaperdas, Stergios. 2006. “Bargaining Versus Fighting.” Defense and Peace Economics, 17(6), 657-676.

Spier, Kathryn E. 1992. “The Dynamics of Pretrial Negotiation.” Review of Economic Studies, 59, 93–108.

Tullock, Gordon. 1980. “Efficient Rent Seeking.” In Toward a Theory of the Rent-seeking Society, ed. James M. Buchanan, Robert D. Tollison, and Gordon Tullock. 97-112. College Station, TX: Texas A&M University Press.

Warnes, Gregory. R., Ben Bolker, and Thomas Lumley. 2008. gtools: various R programming tools. R package version 2.5.0.