Munich Personal RePEc Archive

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.

[img]
Preview
PDF
MPRA_paper_46808.pdf

Download (282kB) | Preview

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.

UB_LMU-Logo
MPRA is a RePEc service hosted by
the Munich University Library in Germany.