Fabrizio Zilibotti (Institute for Empirical Research in Economics) Estonian Economic Association 2014 January 31, 2014

1. War Signals:
A Theory of Trade, Trust and Con‡ict
Dominic Rohner (University of Lausanne) Mathias Thoenig
(University of Lausanne) Fabrizio Zilibotti (University of Zurich)
Estonian Economic Association 2014
January 31, 2014
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2. Introduction
Recurrent Wars
In 1950-2000, over two third of civil con‡icts are "recurrent"
Determinants of civil wars: "Greed" vs. "Grievance"
Greed : cost/bene…t analysis in presence of weak institutions,
natural resource contest, etc.
Grievance: fanaticism, revenge, irrationality of crowds. . .
Persistence in such factors can explain recurrence
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3. Introduction
This paper
A rational choice theory of trust, trade and war
where "distrust" is at the root of recurrent con‡icts
War today hinders inter-ethnic trust
Distrust reduces trade opportunities
and the opportunity cost of future war falls
This leads to recurrent war
Distrust may be "unwarranted"...
without necessarily being irrational
Culprit: imperfect information / learning trap
(related to information cascades)
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4. Introduction
Institutions vs. Social Capital
Recent economic theories emphasize institutions
A number of developing countries with relatively
solid institutions plunge into recurrent con‡icts,
Colombia, India, Turkey, Sri Lanka and the Philippines
(WVS score 0.16)
... whereas other countries with weak institutions and high
ethnic cleavages experienced no civil con‡icts:
Bhutan, Cameroon, Gabon, Kazahstan,
Togo, China and Vietnam (WVS score 0.51)
Institutions do not appear to be the sole determinants of civil war
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5. Introduction
War Persistence and E¤ect of Lagged Trust
LHS: civil war incidence (5-years period, annual in col. 7-8)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
0.36***
0.22***
0.30***
0.17***
0.24***
0.10
0.24***
0.05
(0.01)
War (t-1)
(0.01)
(0.02)
(0.014)
(0.04)
(0.07)
(0.02)
(0.04)
-0.37*
Trust (t-1)
-0.56***
-0.48***
-0.46***
(0.21)
Conflicts coded as war
Controls
>25 Fatal.
>1000 Fatal.
>25 Fatal.
>1000 Fatal.
(0.20)
(0.08)
(0.17)
>25 Fatal.
>1000 Fatal.
>25 Fatal.
>1000 Fatal.
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Observations
1426
1426
1026
939
101
101
564
439
Pseudo R-squared
0.304
0.322
0.363
0.358
0.575
0.572
0.695
0.597
Dependent variable: Civil war incidence (five-year intervals). The dependent variable is coded as 1 if a conflict causing at least 25 (1000) fatalities is recorded
in at least one of the five years. Sample period: 1949-2008. Number of countries for which observations are available: 174. The set of controls include:
lagged democracy, lagged GDP per capita, oil exporter, lagged population, ethnic fractionalization, mountainous terrain, noncontiguous state, region fixed
effects and time dummies. Columns 7-8 have as dependent variable civil war incidence at the annual level (details in the text). The table reports the marginal
effects of logit regressions with robust standard errors, clustered at the country level. Significance levels: * p<0.1, ** p<0.05, *** p<0.01.
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6. Introduction
War Persistence and E¤ect of Lagged Trust
Controls:
democracy: often insigni…cant, negative and signif. in column 6
log GDP[-1]: usually negative, sometimes insigni…cant
ethnic fractionalization: positive and often signi…cant
oil exporter: usually insigni…cant
mountainous terrain: positive and often signi…cant
See, e.g., Fearon and Laitin (2003), Collier and Hoe- er (2004),
Montalvo and Reynal-Querol (2005), Cederman and Girardin
(2007), Collier and Rohner (2008), and Esteban et al. (2012).
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7. Introduction
Causal Impact of War on Trust: Uganda
Rohner, Thoenig and Zilibotti (2011):
"Seeds of Distrust: Con‡ict in Uganda"
Highly fractionalized country (52 groups)
Endemic ethnic con‡icts
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8. Introduction
Causal Impact of War on Trust: Uganda (cont.)
Exogenous change in the intensity
of counter-insurgency after 9/11
Explosion of violence in 2002-04
ending with defeat of main rebel movements
We exploit geolocalized information on con‡ict events (ACLED);
we know where ethnic violence took place
and which ethnic groups it involved
"Pre" and "Post" district-level survey measures
of trust and ethnic identity (Afrobarometer)
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9. Introduction
Causal Impact of War on Trust: Uganda (cont.)
2000
2008
2002:
Museveni starts
“
Operation Iron Fist”
End of 2001:
US Patriot Act declares
LRA and ADF to be
Terrorists
(+end of Congo War)
2005:
ADF defeated,
LRA weakened
2002 - 2004:
Escalation of violence
by rebels and
government
2006:
Ceasefire,
less fighting
13
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10. Introduction
Causal Impact of War on Trust: Uganda (cont.)
Main …ndings:
Intensity of violence at the county and/or ethnic level
decreases trust towards other Ugandans
and increases ethnic identity
Intensity of violence at the district/ethnic level
decreases post-con‡ict economic cooperation
in ethnically fractionalized areas
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11. Introduction
Trade, Trust and Con‡ict
Trade reduces the likelihood of con‡ict:
Martin, Meyer & Thoenig (ReSTud 08; JEEA 08)
India and East Asia: Horowitz (2000), Jha (2008),
Varshney (2001, 2002), Bardhan (1997)
Rwanda: Ingelaere (2007), Pinchotti and Verwimp (2007)
Trade and economic cooperation hinges on trust
and perceived trustworthyness:
Inter-ctry evidence (Guiso, Sapienza & Zingales QJE 09,
Felbermayr & Toubal EER 10)
Social/trade networks help enforcement of
reputation and retaliation (Rauch JIE 99, Greif JPE 94)
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12. Introduction
Road map
Static model
Perfect Information
Imperfect information
Dynamics
War traps
Extensions
Altruism (Markov Perfect Equilibrium)
Stochastic types
Peace traps
Learning from trade
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13. Theory
The Two-Stage Game
A continuum of risk-neutral individuals belonging to
two "ethnic" groups (A and B), each of unit mass
Between-groups interactions are described by a two-stage game:
S1 Group A decides whether or not to wage war against group B
S2 (WAR) No economically interesting decisions
˜
(payo¤ of war to group A is equal to V )
S2 (PEACE) Each agent in group A is randomly matched
to trade with an agent in group B
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14. Theory
S2: Economic Payo¤ of Trade (stag hunt game)
Group B
C
C
D
c, c
h
l, h
Group A
D
h, h
l
h, h
where c > h
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15. Theory
Interpretation
Interpretation(s):
1
2
Defection as opportunistic ("dishonest") behavior
(Hauk and Saez Marti JET 02; Tabellini QJE 08)
Human capital investment
1
2
3
A "successful" partnership requires a costly (l) human capital
investment, e.g., familiarizing oneself with the other group’
s
language and customs
Cooperation=invest; defection=not invest
In line with the classic stag-hunt game
In either interpretation, cooperation is risky (if the other side
defects, the cooperator neither hunts the stag nor the rabbit)
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16. Theory
S2: Economic + Psychological payo¤ of trade
Group B
C
C
c + ιA,i , c + ιB ,j h
D
l + ιA,i , h
Group A
D
h, h
l + ιB ,j
h, h
where c > h
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17. Theory
S2: Distribution of "Cooperative Spirit"
We assume ι to be a continuous random variable,
i.i.d. across agents, drawn from a distribution
with c.d.f. F J : R ! [0, 1]
Group A can be of two types: F A 2 fF + , F g,
where F + …rst-order stochastically dominates F
Group A is civic (trustworthy) if F A = F + ,
and is uncivic if F A = F
F B has a unique realization (for tractability)
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18. Theory
S2: Cooperation in Trade
The optimal strategy (C vs. D) depends on the
proportion of cooperators in the other population
Let z c (h l )
Cooperation is chosen by all agents in group A for whom
ιA
l
z nB ,
where nB is the proportion of cooperators in group B
Cooperation is chosen by all agents in group B for whom
ιB
l
z nA .
where nA is the of proportion cooperators in group A
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19. Theory
S2: Trade Surplus
Trade surplus accruing to group A and B
k
k k
SA = h + znA nB
k
k k
SB = h + znA nB
Z ∞
l z
k
nB
l z
k
nA
Z ∞
(l
ι) dF k (ι)
(l
ι) dF k (ι)
where k 2 f+, g denotes group A’ type
s
Within-group transfers rule out (within-group) ine¢ ciencies
+
+
Note: SA
SA and SB
SB
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20. Theory
S1: Stochastic war
War has a stochastic pay o¤
Motivation: good and bad times to make war...
˜
Discrete support, V 2 fV H , V , V L g such that
˜
˜
if V = V H V = V L war (peace) is always optimal
We call these states war shocks and peace shocks
The associated probabilities are λW and λP
˜
If V = V war or peace may be chosen depending on the
economic surplus. We call this state "business as usual" (BAU)
If S k > V group A chooses peace under BAU
If S k < V group A chooses war under BAU
˜
The realization of V is observed before war decision
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21. Theory
Perfect Information (benchmark)
Multiple equilibria in general possible
Under some conditions on distributions, we prove that
the Nash equilibrium of the trade game is unique
if k = +, group A keeps peace under BAU
if k = , group A wages war under BAU
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22. Theory
Imperfect information
Assume group B does not observe:
1
2
group A’ type
s
˜
the realization of V
Characterize the PBE
Solve the game backwards
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23. Theory
Imperfect information (trade)
Let π P denotes the posterior belief
(after peace) that A is civic
Group A: invest if
l
ιA,i
k
z nB ) nA = F k (znB )
Group B: invest if
ιB ,i
+
z E [nA j π P ] ) nB = F B π P znA + 1
πP
znA
Fixed point yields:
nB = nB
+
P
π
!
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+
+
, nA = nA
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+
P
π
!
, nA = nA
+
P
π
!
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24. Theory
Imperfect information (surplus)
Surplus of group A (relevant for war waging decision)
!
Z
+
Sk
πP
k
= h + znA π P nB π P
∞
(l
l z nB (p )
ι) dF k (ι)
Note: due to strategic complementarity, pessimistic beliefs yield
a collapse of trade surplus irrespective of the true type
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25. Theory
Imperfect information (group A’ trade surplus)
s
Figure: V is pay-o¤ of war under BAU. For π P < π , group A wages war
(under BAU) irrespective of its type. For π P
π , group A does not
wage war (under BAU) if it is of the civic type
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26. Dynamics
Bayesian updating
Young agents acquire beliefs based on warfare history
transmission of private info within "dynasties" in an extension
Posterior beliefs at t are prior beliefs at t+1, etc.
In the "informative" region (of priors)
After peace: π P = π t +1 > π t
t
After war: π t +1 < π t
In the "uninformative" region:
π t +1 = π t no matter what
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27. Dynamics
Dynamic equilibrium
Let rt =
πt
1 πt
(likelihood ratio, r 2 (0, ∞))
war
peace
Trap
r
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28. Dynamics
Dynamic equilibrium (cont.)
In the informative equilibrium region,
beliefs follow an asymmetric random walk with drift
8
> ln rt 1 + ln 1 λW
if Peace
>
λP
<
ln rt =
>
>
: ln rt 1 ln 1 λP
if War
λW
8
< 1 λP if k=Pr (WAR ) =
:
λW
if k=+
In the war trap
ln rt = ln rt 1
Pr (WAR ) = 1 λP
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29. Dynamics
Dynamic equilibrium (cont.)
ln rt
peace
war
Non-recurrent
states
45°
ln
λW
r
1 − λP
ln r
ln rt −1
Figure: Dynamics of beliefs
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30. Dynamics
"Unwarranted" war traps
Suppose group A is civic (k=+)
... but B does not know it
Yet, a sequence of low-probability war shocks
can drive the economy into a (permanent) war trap
War shock
War shock
War shock
Trap
r
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31. Dynamics
Dynamic equilibrium (cont.)
In the long run, the economy can fall into the trap
... but can as well, alternatively, escape the trap forever
If A is civic, the process is a random walk with positive drift,
and the drift pushes the economy away of the "slippery" region
We characterize the prob. distribution over long-run outcomes
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32. Dynamics
Proposition
Assume that V > S + (0) , S (∞) < V < S + (∞) , and r0 > r.
(i) If group A is uncivic,
then the DSE enters the war trap in …nite time with probability one.
(ii) If group A is civic,
then the DSE enters the war trap in …nite time w. prob. PTRAP > 0,
and stays out of the war trap forever with prob. 1 PTRAP > 0.
If the economy stays out of the trap, the DSE converges to perfect
learning, i.e., rt ! ∞, and war incidence stays low ( λW ).
(iii) The probability PTRAP has the following bounds:
0<
λW r
< PTRAP
1 λP r0
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r
< 1.
r0
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33. Dynamics
Proof (sketch)
The proof is based on the Martingale Convergence Theorem:
π t converges almost surely to a limit
It is easy to prove that the limit cannot lie
in the interior of the informative region,
thus either π t enters the trap or limt !∞ π t = 1
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34. Dynamics
Proof (sketch)
Suppose A is uncivic
Then, limt !∞ π t = 1 induces a contradiction
(i.e., the economy converges to a war trap with prob. one)
Suppose limt !∞ π t = 1, then
the economy must remain forever in the informative region
But, then, the Law of Large Numbers would imply that B could
observe an in…nite no. of realizations of the war/peace process,
and eventually learn the truth, i.e., that A is uncivic
A contradiction
Suppose A is civic
Then, group B can learn asymptotically the truth (i.e.,
limt !∞ π t = 1) with positive probability
However, a …nite no. of war shocks precipitates the economy
into the war trap. This happens with positive probability
(since it takes a …nite no. of steps to enter the traps)
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35. Dynamics
Taking stock
In summary, supposing A is civic:
With a positive probability
the economy converges to perfect (correct) learning
With a positive probability the economy stops learning
We can provide bounds to the
probability that the economy falls into the trap
Economic development hinges on luck, i.e.,
the realization of the stochastic process of peace/war
(similar to Acemoglu and Zilibotti JPE 1997).
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36. Extensions
Extensions
Altruistic agents:
Internalize the negative e¤ect of war on future generations
Characterize the Markov equilibrium of the dynamic game
Stochastic types
With a positive probability group A’ type changes
s
(Markov switching probability)
Peace trap together with war traps
Learning from trade
Traders acquire some private information about
the other group’ type
s
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37. Extensions
Stochastic types
Cultural shocks drive shifts of group A’ type
s
(e.g., ancient Vikings vs modern Scandinavians)
As time goes by the discredit of group B washes away
Can war traps be averted?
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38. Extensions
Stochastic types (cont.)
Two-state Markov chain:
+
k
+
1
θ
φ
θ
1
φ
φ 1/2 and θ 1/2, implying a positive autocorrelation
The unconditional (long run) likelihood ratio
that A is civic is r = φ/θ
ˆ
The type shock is realized at the
beginning of each period, before war decision
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39. Extensions
Stochastic types (cont.)
Posterior at t now di¤ers from prior at t+1
Bayes rule yields
(1 θ )rt 1 + φ
θrt 1 + 1 φ
In the informative region, after war and peace
8
> r (rt 1 ) 1 λλW if peace
< ˜
P
rt =
>
λW
: r (r )
˜ t 1
if war
1 λP
r (rt
˜
1)
=
In uninformative region (irrespective of war/peace)
rt = r (rt
˜
1)
=
(1 θ )rt 1 + φ
θrt 1 + 1 φ
Three possibilities
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40. Extensions
Stochastic types (cont.)
CASE 1: TRAP
r(t+1)
r(t)
uninformative
region
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informative
region
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41. Extensions
Stochastic types (cont.)
CASE 2: NO TRAP
r(t+1)
ergodic set
r(t)
uninf.
region
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informative
region
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42. Extensions
Stochastic types (cont.)
CASE 3: CYCLES
r(t+1)
ergodic set
r(t)
uninform.
region
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informative
region
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43. Extensions
Peace Traps
Figure: Surplus from trade and war bene…ts; the case of two traps.
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44. Extensions
Peace Traps
ln rt
peace
Non-recurrent
states
Non-recurrent
states
war
45°
ln
λW
r
1 − λP
ln r
ln r *
ln r
ln rt −1
Figure: Dynamics of beliefs with two traps
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45. Extensions
Learning from trade
Agents can acquire and retain some information
through their individual family trade history
Simplifying assumption:
as soon as an agent trade, she observes the true k
This "hard" information is transmitted to the o¤spring
Without additional assumptions,
all agents would learn perfectly k over time.
We assume that the inter-generational transmission of
"hard" information is imperfect: with probability θ, the
child of an informed parent fails to receive the information.
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46. Extensions
Learning from trade
Suppose the proportion of informed players is exogenous
Informed players reduce the scope of learning traps
Figure: Trade surplus with di¤erent proportion of informed players, ι.
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47. Extensions
Learning from trade
Suppose k=+ and ι is endogenous
Now, peace periods have the additional virtue
that some people "learn through trade"
However, during war, there is no direct learning,
and in fact some information from past trade gets lost
More formally,
ι t +1 = (1
θ )[ιt + (1
Wt )
τ
(1
ιt )]
Result no. 1:
For large enough θ a war trap continue to exist
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48. Extensions
Learning from trade
Result no. 2:
Cycles are a generic feature of the equilibrium:
the economy enters the uninformative region,
where war is frequent and trade is scant
wars make fall the economy "deeper"
into the uninformative region
however, a sequence of peace shocks
(by inducing trade and learning) can rescue the economy
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49. Conclusions
Conclusions
A rational theory of persistent (ine¢ cient) wars
Business relations are key to preserve stable peace
Peace-keeping forces can be ine¢ cient when trust has collapsed,
since they fail to restore trade and economic cooperation
(consistent with the empirical evidence)
Policies aimed to restore trade and trust are more promising
positive campaigns about
successful inter-ethnic business partnerships
targeted human capital subsidies reducing the cost of trading
with the other groups (e.g., learning languages, customs)
changes in social norms (persuasion campaign?)
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50. Conclusions
In progress
Limitation (common in the literature):
con‡ict as a two-group game
Yet, in many con‡icts there are complicated network of alliances
Complementarity, substitution and externalities
in …ghting and sharing the "prize"
Work in progress with M. Koenig, D. Rohner, and M. Thoenig
contest success function (Tullock game)
an explicit network of alliances and rivalries
Nash equilibrium)e¤ort depends on groups’centrality
structural estimation based on Congo (DRC) war
policy: key player analysis
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