Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267273 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 10040
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We consider a dynamic setting in which two sovereign states with overlapping ownership claims on a resource/asset first arm and then choose whether to resolve their dispute violently through war or peacefully through settlement. Both approaches depend on the states' military capacities, but have very different outcomes. War precludes the possibility of international trade and can be destructive; however, once a winner is declared, arming is unnecessary in future periods. By contrast, a peaceful resolution avoids destruction and supports mutually advantageous trade; yet, settlements must be renegotiated in the shadow of arming and the threat of war. In this setting, we characterize the conditions under which peace arises as a stable equilibrium over time. We find that, depending on the destructiveness of war, time preferences, and the initial distribution of resource endowments, greater gains from trade can reduce arming and pacify international tensions. Even when the gains from trade are relatively small, peace might be sustainable, but only for more uneven endowment distributions.
Subjects: 
interstate war
armed peace
unarmed peace
security policies
gains from trade
shadow of the future
JEL: 
C72
C78
D30
D70
D74
F10
F51
F60
Document Type: 
Working Paper
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