Bilateral war in a multilateral world: carrots and sticks for conflict resolution

Abstract.  This paper constructs a three-country, specific-factor, trade-theoretic model in which two of the countries are in conflict and where war effort is determined endogenously in a Nash equilibrium. The third country does not take part in the war, but trades with the warring countries. In the framework, we examine, inter alia, how war and welfare are affected by globalization and by two instruments available to the third country – one carrot and one stick. Our overall conclusion is that the third parties do have the incentives for, and can play an effective role in, conflict resolution. JEL classification: F02, F11, H56, H77