War, peace, and the size of countries

This paper studies the relationship between international conflict and the size distribution of countries in a model in which both peaceful bargaining and nonpeaceful confrontations are possible. We show how the size distribution of countries depends on the likelihood, benefits, and costs of conflict and war. We also study the role of international law and show how better defined international ‘property rights’ may lead to country breakup and more numerous local conflicts.     

Exploring the nexus: Foreign aid,war on terror,and conflict in Pakistan

This study explores the nexus between foreign aid, war on terror, and terrorism in Pakistan for the period 1972–2010. By making use of Johansen method of cointegration, the paper concludes that, contrary to the popular assumption, there is no association between foreign assistance and conflict in Pakistan. However, the impact of foreign aid on terrorism is positive in the long run during the war on terror period. Furthermore, the positive impact of GDP on terrorism mirrors the fact that militants consider terrorist attacks a feasible option compare to open war in face of enhanced state capacity. The study also unearths the non-linear U-shape relationship between political repression and violence in the long run.     

Poverty, political freedom, and the roots of terrorism in developing countries: An empirical assessment

We find that political freedom has a significant and non-linear effect on domestic terrorism, but has no statistically significant effect on transnational terrorism. Geography and fractionalization limit a country’s ability to curb terrorism, while strong legal institutions deter terrorism.     

Terrorist backlash, terrorism mitigation, and policy delegation

This paper presents a three-stage proactive game involving terrorists, elected policymakers, and voters. In each of two targeted countries, a representative voter chooses an elected policymaker, charged with deciding proactive countermeasures to ameliorate a transnational terrorist threat. Two primary considerations drive the voters' strategic choice: free riding on the other countries' countermeasures and limiting a reprisal terrorist attack. The resulting low proactive countermeasures benefit the terrorists, whose attacks successfully exploit voters' strategic actions. This finding stems from a delegation problem where leadership by voters has a detrimental consequence on the well-being of targeted countries. Domestic politics add another layer of concern when addressing a common terrorist threat.     

Aiding violence or peace? The impact of foreign aid on the risk of civil conflict in sub-Saharan Africa

This paper considers the impact of foreign aid flows on the risk of civil conflict. We improve on earlier studies on this topic by addressing the problem of the endogenous aid allocation using GDP levels of donor countries as instruments. A more structural addition to the literature is that we efficiently control for unobserved country specific effects in typical conflict onset and conflict continuation models by first differencing. The literature often overlooks the dynamic nature of these types of models, thereby forcing unlikely i.i.d. structures on the error terms implicitly.¹ As a consequence, malfunctioning institutions, deep-rooted political grievances, or any other obvious, yet unobserved and time persistent determinants of war are simply assumed away. We find a statistically significant and economically important negative effect of foreign aid flows on the probability of ongoing civil conflicts to continue (the continuation probability), such that increasing aid flows tends to decrease civil conflict duration. We do not find a significant relationship between aid flows and the probability of civil conflicts to start (the onset probability).     

Arms production,national defense spending and arms trade: Examining supply and demand

Scholars have estimated demand functions for national defense spending and investigated international arms trade for a long time. The relationship between supply and demand for military goods has, however, only been examined on aggregate level or in formal models yet. I investigate how the supply of military goods by arms-producing companies and the demand for military goods by both the national government and foreign governments are related by using a panel of up to 195 arms-producing companies in 21 countries for the period 2002–2016. The results show that if the demand for national defense spending increases by 1%, the arms sales by a country’s largest arms-producing companies increase by up to 1.2%. If exports of major conventional weapons increase by 1%, sales increase by up to 0.2%. Arms imports do not affect domestic arms sales because imported and domestically produced arms are complements, and countries mainly import those arms they do not produce themselves. Country-specific estimation results suggest that differences among countries in geopolitical conditions and international relations determine whether a country’s arms industry serves economic rather than security purposes.     

Immigration,Conflict, and Redistribution

In this paper, we analyze how the possibility of conflict between natives and immigrants shapes income redistribution in developed democracies. This possibility can generate income redistribution towards immigrants even if they have no voting rights. We show that the threat of conflict between natives and immigrants lowers vertical income redistribution (from the rich to the poor) as the level of immigration increases. The opposite holds for horizontal income redistribution (from natives to immigrants), which increases with the level of immigration. Income inequality weakens the negative effect of immigration on vertical redistribution, but it also reduces horizontal redistribution. These theoretical predictions are consistent with the results of our empirical analysis on data from 29 European countries: larger immigrant populations are associated with more redistribution towards immigrants and lower vertical redistribution.     

Conflict and the Social Contract*

We consider social contracts for resolving conflicts between two agents who are uncertain about each other's fighting potential. Applications include international conflict, litigation and elections. Even though only a peaceful agreement avoids a loss of resources, if this loss is small enough, then any contract must assign a positive probability of conflict. We show how the likelihood of conflict outbreak depends on the distribution of power between the agents and their information about each other.     

The political economy of secession: The case of Quebec

In the absence of oppression, citizens of a sub-unit who contemplate secession carefully weigh the benefits and costs of different outcomes. Here these costs are shown to be highly variable: they depend on the strategic behavior of each state and on whether cooperative relations would be re-established after secession. Using Quebec as a case, it is shown that threats of non-cooperation by the predecessor state may be discounted as not credible. Elementary game theory, however, shows that, with repeat play, retaliatory non-cooperation could be a rational strategy. Moreover, it is shown that reaching a compromise solution requires a credible threat on the part of the potential secessor to accept a sovereignty where there would be no economic cooperation. In modern welfare states, these risks are severe enough to make secession rare, and incremental constitutional change the norm. For comments on earlier drafts of this paper I am grateful to Gordon Tullock, Isidoro Massa, other participants at meetings of the Public Choice Society and the European Public Choice Society, Ignatius Horstmann, Douglas Brown, the editors, and two anonymous referees. Errors are mine.     

Terrorist threats,information disclosures,and consumer sovereignty

This paper proposes the use of consumers’ preferences in formulating policies for keeping secret information about terrorist activities and threats that might compromise future security. We report the results from two surveys indicating that support for government secrecy varies across situations depending on the threat and context. A majority of respondents preferred full disclosure of some information related to terrorist threats regardless of the consequences for specific industries or future threats, in particular threats involving attacks on commercial airlines. However a majority of respondents were willing to allow government authorities to withhold information about the details of threats to the financial system and to buildings if revealing the information might compromise future investigations. While the public generally recognizes the importance of keeping some information secret, a democratically elected government should seek to understand the preferences of its citizens on important policy issues related to public safety and security.     

Terrorism and the world economy

It has been argued that terrorism should not have a large effect on economic activity, because terrorist attacks destroy only a small fraction of the stock of capital of a country (see, e.g., Becker, G., Murphy, K., 2001. Prosperity will rise out of the ashes. Wall Street Journal October 29, 2001). In contrast, empirical estimates of the consequences of terrorism typically suggest large effects on economic outcomes (see, e.g., Abadie, A., Gardeazabal, J., 2003. The economic cost of conflict: A case study of the Basque country. American Economic Review 93, 113-132). The main theme of this article is that mobility of productive capital in an open economy may account for much of the difference between the direct and the equilibrium impact of terrorism. We use a simple economic model to show that terrorism may have a large impact on the allocation of productive capital across countries, even if it represents a small fraction of the overall economic risk. The model emphasizes that, in addition to increasing uncertainty, terrorism reduces the expected return to investment. As a result, changes in the intensity of terrorism may cause large movements of capital across countries if the world economy is sufficiently open, so international investors are able to diversify other types of country risks. Using a unique data set on terrorism and other country risks, we find that, in accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5% of GDP. The magnitude of the estimated effect is large, which suggests that the “open-economy channel” impact of terrorism may be substantial.     

Terms of trade volatility,government spending cyclicality,and economic growth

This paper presents estimates of the effects that terms of trade volatility has on real gross domestic product (GDP) per capita growth. Based on 5‐year nonoverlapping panel data comprising 175 countries during 1980 to 2010, the paper finds that terms of trade volatility has significant negative effects on economic growth in countries with procyclical government spending. In countries where government spending is countercyclical, terms of trade volatility has no significant effect on growth. Conditional on the mediating role of government spending cyclicality, the GDP share of domestic credit to the private sector has no significant effect on the relationship between growth and terms of trade volatility.     

Income taxes, spending composition and long-run growth

The focus of this paper is threefold. First, it reexamines the impact on long-run growth of changes in flat-rate income taxes when a fraction of total government expenditures is used to provide public services that affect the productivity of privately held inputs. Second, for a given tax policy, this paper studies the impact of government expenditure composition on the rate of economic growth. Third, since demographics follow an overlapping generations structure and fiscal policy affects the economy's productivity, the paper features the role of productivity as a means of redistributing income across generations. The economy is analyzed numerically and policy experiments are carried out.     

Hit and (they will) run: The impact of terrorism on migration

We analyze the influence of terrorism on migration for 152 countries during 1976-2000. We find robust evidence that terrorism is among the ‘push factors’ of skilled migration, whereas it is not robustly associated with average migration.     

Group Contests with Internal Conflict and Power Asymmetry

We investigate simultaneous inter‐ and intra‐group conflict in the shadow of within‐group power asymmetry and complementarity in members' group‐conflict efforts. A more symmetric group faces a higher degree of internal conflict, and might expend more effort in external conflict when the group‐conflict effort technology is highly complementary. Depending on the degree of complementarity, the stronger player's relative contribution to external conflict might be higher in a more asymmetric group and, as a result, it is possible for the weaker player to earn a higher payoff. In the absence of any complementarity, the rent‐dissipation is non‐monotonic with the within‐group power asymmetry.     

Trade tariff,wage gap and public spending

This paper studies the interplay between wage gap and government spending in a small open economy facing a shock in trade policy. We consider a specific factor model with an export sector, which uses skilled labour, and an import-competing sector, which uses unskilled labour. We find the conditions under which there exists an inverse (direct) relation between trade liberalization (protection), which increases (decreases) the skilled-unskilled wage gap, and the level of government expenditure. We also show how either an unbalanced distribution of political bargaining power, or tariff revenue co-financing public spending may break this inverse relation. Moreover, the direct relation between tariff protection and public goods provision can be strenghtened by progressive taxation and weakened by regressive taxation.     

A Theory of Civil Conflict and Democracy in Rentier States*

The effects of resource rents on the political equilibrium have been studied in two main types of models. The first tradition uses models of conflict, and studies how resource rents affect the intensity and duration of civil conflict. The second tradition uses political economy models, where resource rents affect the political equilibrium due to changes in the costs and benefits of buying votes. Although they provide considerable insight, these traditions have little to say about when democracy emerges, and about when conflict emerges. In this paper, by integrating the earlier model traditions, we suggest the simplest possible framework we can think of to study the choice between conflict and democracy. We show how factors such as resource rents, the extent of electoral competition, and productivity affect economic and political equilibria.     

Partial decentralization as a way to prevent secessionist conflict

We study secessionist conflict driven by cultural and economic motives in a political union of two regions, and analyze under what conditions partial decentralization may serve as a conflict-mitigating strategy. While the probability of a successful secession is increasing in heterogeneity, it is increasing in interregional income inequality if and only if the union is socially efficient to start with. If the cost of diversity decreases proportionally with decentralization, there always exists a range of decentralization levels compatible with peace. Greater inequality always widens this range but greater heterogeneity widens the range if and only if the union is efficient. The decentralization level implemented to prevent conflict relates to the underlying secession probability. If decentralization is not reversible, peace is not self-enforcing, yet multiple rounds of decentralization can be used to postpone the eventual date of secession.     

Social Conflict and Gradual Political Succession: An Illustrative Model*

This paper studies the evolution of political institutions in the face of conflict. We examine institutional reform in a class of pivotal mechanisms—institutions that behave as if the resulting policy were determined by a “pivotal” decision maker drawn from the potential population of citizens and who holds full policy‐making authority at the time. A rule‐of‐succession describes the process by which pivotal decision makers in period t + 1 are, themselves, chosen by pivotal decision makers in period t. Two sources of conflict—class conflict, arising from differences in wealth, and ideological conflict, arising from differences in preferences—are examined. In each case, we characterize the unique Markov‐perfect equilibrium of the associated dynamic political game, and show that public decision‐making authority evolves monotonically downward in wealth and upward in ideological predisposition toward the public good. We then examine rules‐of‐succession when ideology and wealth exhibit correlation.     

Vibert's European union: A United Nations or a United States?

In his book, Europe: A Constitution for the Millennium, Frank Vibert explores every major issue that will arise in the design of a constitution for a European political union. Can the theoretical constructs of constitutional economics be used to aid in the practical design of a European constitution? This is what Vibert attempts to do in his book. This review contains a more detailed discussion and analysis of a few of Vibert's main theses. In particular, it focuses, on several key issues that will be the major determinants of whether the European Union will achieve lasting success.