January, 2014

The Costs of Conflict

  • Peter Leeson

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
  • Adam C. Smith

    Assistant Professor of Economics, Johnson and Wales University
  • Daniel Houser

    Professor and Chairman, Department of Economics at George Mason University
  • Ramin Osted

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Read this article on ScienceDirect. 

Violent conflict destroys resources. It generates “destruction costs.” These costs have an important effect on individuals’ decisions to cooperate or conflict. We develop two models of conflict: one in which conflict's destruction costs are independent of individuals’ investments in “arms”—the tools of conflict—and another in which conflict's destruction costs depend on those investments. Our models demonstrate that when conflict's destruction costs are arms-dependent, conflict is more costly, making cooperation more likely. We test this prediction with a laboratory experiment in which subjects first choose how heavily to invest in arms and then choose whether to cooperate or conflict in an environment where interaction is repeated. In one set of treatments conflict's destruction costs are arms-independent. In another they are arms-dependent. Our experimental results support our models’ predictions. Compared to when conflict's destruction costs are arms-independent, when those costs are arms-dependent, cooperation increases by nearly a third.