University of Ottawa ext University, 9th floor

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1 Economics of Conflict Professor: ECO4193 (Winter 2017) Louis Hotte University of Ottawa ext University, 9th floor Ottawa, Ontario, Canada K1N 6N5 lhott3/ Office hours: Mondays 2:30-4:00pm Prerequisites Before taking this course, the student must have successfully completed ECO2145 Microeconomic Theory II (or an equivalent approved by the Faculty). No exception can be granted. It is the student s responsibility to deregister from this course if he/she does not satisfy this requirement. Description In economics, one typically finds that a good can be acquired through either production or exchange. In doing so, forceful appropriation is being ignored as a third important option. In a large stroke, explicit consideration of this third option is the subject of the economics of conflict. There is appropriation when A obtains a benefit from B that is not the outcome of a free choice by the parties. If B resists, conflict may result. The occurrence, intensity and nature of a conflict depends on a host of factors, such as the value of the contested benefit, the laws, norms, and customs of a society, the state s protection services, the technology of production, the technology and cost of private protection, grievances in the face of perceived injustices, etc. Sometimes, those factors combine in such a way that people see the use of destruction and violence as justified or profitable options. Uncovering the role played by those factors is one main object of conflict economics. Understanding conflict is understanding peace. This course may just as well have been entitled Economic Analysis of Peace. Indeed, as economists we are ultimately concerned about people s welfare, which not only depends on whether there is peace or conflict but also about how scarce resources are being allocated. Very often, people choose in the shadow of conflict as they try to avoid conflict. This also affects the allocation of scarce resources. Under especially dark conflict shadows, peaceful equilibria may come at a large cost in the form of economic stagnation, poverty, environmental degradation, etc. Those are also the sort of issues that will be covered in this course. As a sub-discipline of economics, conflict economics preserves the fundamental assumption that agents are (mostly) rational actors who make decisions in order to achieve a goal for which they accord value. The tools of analysis being used are therefore no different from other fields in economics as we will alternate between theoretical and empirical work. Game theory is a particularly useful analytical tool, given that the parties to a conflict are obviously expected to behave strategically. Empirical studies will often be based on econometric 1

2 methods for which a brief introduction will be provided. Evaluation Although a course in economics can be somewhat technical, it remains a course in economics as a social science. Much emphasis is thus put on interpreting the results and discussing their implications for society and economic policy. The evaluation will reflect this. The ability to interpret and discuss results can only be properly achieved through longterm maturation of ideas. Students are thus expected to be up-to-date in their weekly material. To this end, exercises and/or readings will be assigned each week and be the subject of a quiz on the following week. Quizzes (40%) Each Wednesday class will begin with a twenty-minute quiz. Each quiz counts for 5% and, unless otherwise noted, will cover the material of the previous two weeks (not including the Monday before). The best eight quizzes will be used for the final mark. This means that a student can miss two quizzes and still get full marks. However, if you miss three quizzes or more because of a medical issue or other reason (as per Faculty rule), then you will need to provide a medical note justifying all absences, not just the third or fourth one. No quiz will be given on January 11 and 18. Term paper (30%) Details will be provided in a separate document. Marked progress reports will be required over the semester. The final submission deadline of a printed paper version is April 7. (No possibility of extension here, as per Faculty rules. Each day late will receive a 5% penalty.) Final exam (30%) A two-hour final exam will be given during the final-exam period. Its precise date will be determined by the Faculty. Course notes and material There is no textbook for this course. The study material is based on classnotes and articles assigned to read. List of themes 1 1. Introduction What is conflict? Types of conflicts How can economics contribute to our understanding? References: (Hotte 2013)(Danielsen 1975) 1 Themes, references, readings and their sequence are subject to change. 2

3 2. Property rights and conflict A) Basic concepts On the concept of property rights An example: The open-access fishery (Gordon 1954) The Coase theorem The smoking factory example The pigovian tax (non)solution The noisy airport example Bargaining and transaction costs Property rights as exclusion A synthesis: Exclusion, coercion and transaction costs B) Games and strategic behavior The two goat herder free access model (Cheung 1970) The Nash equilibrium concept The reaction function The n goat herder free access model (Dasgupta and Heal 1979) Common property resources, transaction costs and coercion (Ostrom 1990;2000) References: Gordon 1954; Coase 1960; Cheung 1970; Dasgupta and Heal (1979); Penner 2000; Umbeck 1981; Hotte (2005); Ostrom (1990;2000) 3. State creation, war and coercion War making and the evolution of state forms The state as a monopoly of violence Protection as shelter or racket The European history of state creation Lessons for today s developing world References: Tilly (1985) 4. Empirical paper 1: Civil conflict in Colombia Commodity Price Shocks and Civil Conflict: Evidence from Colombia, Review of Economic Studies, Dube and Vargas, 2013 Introduction to empirical analysis in economics How to interpret a regression table A format for an empirical paper General questions - Methodology - Theoretical arguments - Context - The data - Summary statistics - Dependent and explanatory variables - Empirical strategy - Main results - Regression tables - Robustness checks - Conclusion References: Dube and Vargas (2013); Meier and Rauch (2000; Appendix) 5. Three microeconomic models of conflict A) A barebones model of conflict Representation of a technology of conflict Reaction functions with fighting efforts Concept of fighting intensity B) A model of conflict with natural resource use (Hotte 2001) Equilibrium concept with sequential moves Asymmetric fighting productivities Unsustainable resource use as a substitute for conflict C) A model of conflict with production (Hirshleifer 1995) Productive vs non-productive activities Decisiveness of the conflict technology The paradox of power References: (Hirshleifer 1995)(Skaperdas 1996)(Hotte 2001)(Hotte 2013) 6. Empirical paper 2: Ethnic violence and cultural norms in Germany Persecution Perpetuated: The Medieval Origins of Anti-Semitic Violence in Nazi Germany, Quarterly Journal of Economics, Voigtländer and Voth,

4 7. Bargaining and conflict The settlement opportunity set The potential settlement region Asymmetric information Commitment problems Indivisibilities Benevolence Political bias References: ; Kennan and Wilson (1993); Jackson and Morelli (2007); Acemoglu and Robinson (2001, 2006); Esteban and Ray (2001); Fearon (1995); Skaperdas (2006); Powell (2006), Hirshleifer (1995), Blattman (2010) 8. Empirical paper 3: Foreign aid and conflict U.S. Food Aid and Civil Conflict, American Economic Review, Nunn and Qian, 2014 References: Nunn and Qian (2014) 9. Civil conflict An overview References: Blattman and Miguel (2010); Deininger (2003); Hendrix (2010) 10. Trade, property rights, and conflict A trade model with ill-defined property rights Institutions and apparent comparative advantage A trade model with endogenous property rights References: Chichilnisky (1994); Brander and Taylor (1997); Hotte, Long and Tian (2000); Garfinkel, Skaperdas and Syropoulos (2008); Hotte (2013) 11. Empirical paper 4: Domestic violence The Gender Wage Gap and Domestic Violence, American Economic Review, Anna Aizer, 2010 References: Bloch and Rao (2002); Aizer (2010); Bobonis et al. (2013); Eswaran and Malhotra (2011) 12. Some economics of crime An overview A model of theft and natural resource use Resource under-exploitation A model of trespass and natural resource use Resource over-exploitation References: (Becker 1968)(Ehrlich 1973) (Ayres and Levitt 1998)(Helsley and Strange 2005)(Helsley and Strange 1994) (Hotte, Valognes and van Ypersele 2003)(Hotte and van Ypersele 2008)(Sah 1991)(Hotte, McFerrin and Wills 2013) 13. Empirical paper 5: Extortion and Piracy The Simple Economics of Extortion: Evidence from Trucking in Aceh, Journal of Political Economy, Olken and Barron, 2009 The anti-commons Too much exclusion? References: Buchanan and Yoon (2000); Olken and Barron (2009); Leeson (2007); Leeson (2009); de Groot et al. (2011) 4

5 14. Micro-conflicts under weak state presence An overview References: Umbeck (1981); Libecap and Wiggins (1984,1985); Hotte (2001); Alston, Libecap and Mueller (2000); de Groot, Rablen and Shortland (2011) 15. Natural resource abundance and civil conflict An overview References: Collier and Hoeffler (1998,2004); Fearon (2005); Humphrey (2005); Ross (2004); Dube and Vargas (2013); Boschini, Pettersson and Roine; Maystadt et al. (2014) 16. Empirical paper 6: Mining and conflict Mineral Resources and Conflicts in DRC: A Case of Ecological Fallacy, Oxford Economic Papers, Maystad et al., 2014 Reference: Maystadt et al. (2014) 17. Scarcity and conflict An overview References: Durham (1979); Homer-Dixon (1999); André and Platteau (1998); Hsiang, Meng and Cane (2011) References Acemoglu, D., and J. A. Robinson (2001) A theory of political transitions. American Economic Review 91, Acemoglu, Daron, and James S. Robinson (2006) Economic Origins of Dictatorship and Democracy (New York, NY, USA: Cambridge University Press) Aizer, Anna (2010) The gender wage gap and domestic violence. The American Economic Review 100, Alston, Lee J., Gary D. Libecap, and Bernardo Mueller (2000) Land reform policies, the sources of violent conflict, and implications for deforestation in the brazilian amazon. Journal of Environmental Economics and Management 39, Anderton, Charles H., and John R. Carter (2009) Principles of conflict Economics (Cambridge Universitry Press) André, Catherine, and Jean-Philippe Platteau (1998) Land relations under unbearable stress: Rwanda caught in the malthusian trap. Journal of Economic Behavior and Organization 34, 1 47 Ayres, Ian, and Steven D. Levitt (1998) Measuring positive externalities from unobservable victim precaution: An empirical analysis of lojack. Quarterly Journal of Economics pp

6 Becker, Gary S. (1968) Crime and punishment: An economic approach. Journal of Political Economy 76, Blattman, Christopher, and Edward Miguel (2010) Civil war. Journal of Economic Literature 48, 3 57 Bloch, Francis, and Vijayendra Rao (2002) Terror as a bargaining instrument: A case study of dowry violence in rural india. American Economic Review 92, Bobonis, Gustavo J., Melissa González-Brenes, and Roberto Castro (2013) Public transfers and domestic violence: The roles of private information and spousal control. American Economic Journal: Economic Policy 5, Boschini, Anne D., Jan Pettersson, and Jesper Roine (2007) Resource curse or not: A question of appropriability. Scandinavian Journal of Economics 109, Brander, James A., and M. Scott Taylor (1997) International trade and open access renewable resources: The small open economy case. Canadian Journal of Economics XXX(3), Buchanan, James M., and Yong J. Yoon (2000) Symmetric tragedies: Commons and anticommons. Journal of Law and Economics XLIII, 1 13 Cheung, Steven N. S. (1970) The structure of a contract and the theory of a non-exclusive resource. Journal of Law and Economics XIII, Chichilnisky, Graciela (1994) North-south trade and the global environment. The American Economic Review 84(4), Coase, R.H.(1960) Theproblemofsocialcost. The Journal of Law and EconomicsIII,1 44 Collier, Paul, and Anke Hoeffler (1998) On economic causes of civil war. Oxford Economic Papers 50, Collier, Paul, and Anke Hoeffler (2004) Greed and grievance in civil war. Oxford Economic Papers 56, Danielsen, Albert L. (1975) A theory of exchange, philanthropy and appropriation. Public Choice 24, Dasgupta, P. S., and G. M. Heal (1979) Economic Theory and Exhaustible Resources (Welwyn, England: James Nisbet and Co. Ltd and Cambridge University Press) de Groot, Olaf J., Matthew D. Rablen, and Anja Shortland (2011) Gov-aargh-nance - even criminals need law and order. Economics of Security Working Paper 46, Berlin: Economics of Security Deininger, Klaus (2003) Causes and consequences of civil strife: Micro-level evidence from uganda. Oxford Economic Papers 55,

7 Dube, Oeindrila, and Juan Vargas (2013) Commodity price shocks and civil conflict: Evidence from colombia. Review of Economic Studies Durham, William H. (1979) Scarcity and Survival in Central America: Ecological Origins of the Soccer War (Stanford, California: Stanford University Press) Ehrlich, Isaac (1973) Participation in illegitimate activities: A theoretical and empirical investigation. Journal of Political Economy 81, Esteban, Joan, and Debraj Ray (2001) Social decisions rules are not immune to conflict. Economics of Governance 2, Eswaran, Mukesh, and Nisha Malhotra (2011) Domestic violence and women s autonomy in developing countries: theory and evidence. Canadian Journal of Economics 44, Fearon, James D. (1995) Rationalist explanations for war. International Organization 49, (2005) Primary commodity exports and civil war. Journal of Conflict Resolution 49, Garfinkel, Michelle R., Stergios Skaperdas, and Constantinos Syropoulos (2008) Globalization and domestic conflict. Journal of International Economics 76, Gordon, H. Scott (1954) The economic theory of a common-property resource: The fishery. Journal of Political Economy VXII, Helsley, Robert W., and William C. Strange (1994) Exclusion and the private enforcement of property rights. Journal of Public Economics 53, Helsley, Robert W., and William C. Strange (2005) Mixed markets and crime. Journal of Public Economic pp Hendrix, Cullen. S. (2010) Measuring state capacity: Theoretical and empirical implications for the study of civil conflict. Journal of Peace Research 47, Hirshleifer, Jack (1995) Theorizing about conflict. In Handbook of defense economics, ed. K. Hartley and T. Sandler (Elsevier Science) chapter 7, pp Homer-Dixon, Thomas F. (1999) Environment, Scarcity, an Violence (Princeton University Press) Hotte, Louis (2001) Conflicts over property rights and natural-resource exploitation at the frontier. Journal of Development Economics 66, 1 21 (2005) Natural-resource exploitation with costly enforcement of property rights. Oxford Economic Papers 57(3),

8 (2013) Environmental conflict and natural resources. In Encyclopedia of Energy, Natural Resources and Environmental Economics, ed. Jason Shogren (Oxford: Elsevier Science) pp Hotte, Louis, and Tanguy van Ypersele (2008) Individual protection against property crime: decomposing the effects of protection observability. Canadian Journal of Economics 41, Hotte, Louis, Fabrice Valognes, and Tanguy van Ypersele (2003) Property crime with private protection: A market-for-offenses approach. Discussion Paper 3782, Centre for Economic Policy Research (CEPR), London, UK, February Hotte, Louis, Ngo Van Long, and Huilan Tian (2000) International trade with endogenous enforcement of property rights. Journal of Development Economics 62, Hotte, Louis, Randy McFerrin, and Doug Wills (2013) On the dual nature of weak property rights. Resource and Energy Economics 35(4), Hsiang, Solomon M., Kyle C. Meng, and Mark A. Cane (2011) Civil conflicts are associated with the global climate. Nature 476, Humphreys, Macartan (2005) Natural resources, conflict, and conflict resolution: Uncovering the mechanisms. Journal of Conflict Resolution 49, Jackson, Matthew O., and Massimo Morelli (2007) Political bias and war. American Economic Review 97, Kennan, John, and Robert Wilson (1993) Bargaining with private information. Journal of Economic Literature 31, Leeson, Peter T. (2007) An-arrgh-chy: The law and economics of pirate organization. Journal of Political Economy 115, 6 (2009) The invisible hook: The law and economics of pirate tolerance. New York University Journal of Law and Liberty Libecap, G., and S. N. Wiggins (1985) The influence of private contractual failure on regulation: The case of oil field unitization. Journal of Political Economy 93, Libecap, Gary D., and Steven N. Wiggins (1984) Contractual responses to the common pool: Prorationing of crude oil production. American Economic Review Maystadt, Jean-Francois, Giacomo De Luca, Petros G. Sekeris, and John Ulimwengu (2014) Mineral resources and conflicts in drc: A case of ecological fallacy. Oxford Economic Papers 66, Meier, Gerald M., and James E. Rauch (2000) Leading Issues in Economic Development, seventh ed. (Oxford, U.K.: Oxford University Press) 8

9 Nunn, Nathan, and Nancy Qian(2014) U.s. food aid and civil conflict. Amaerican Economic Review 104(6), Olken, Benjamin A., and Patrick Barron(2009) The simple economics of extortion: Evidence from trucking in aceh. Journal of Political Economy 117(3), Ostrom, Elinor (1990) Governing the Commons: The evolution of institutions for collective action (Cambridge, England: Cambridge University Press) Ostrom, Elinor (2000) Collective action and the evolution of social norms. Journal of Economic Perspectives 14, Penner, James (2000) The Idea of Property in Law (Oxford Universitry Press) Powell, Robert (2006) War as a commitment problem. International Organization 60, Ross, Michael L. (2004) What do we know anbout natural resources and civil war? Journal of Peace Research 41, Sah, Raaj K. (1991) Social osmosis and the patterns of crime. Journal of Political Economy 99(6), Skaperdas, Stergios (1996) Contest success functions. Economic Theory 7, Skaperdas, Stergios (2006) Bargaining versus fighting. Defence and Peace Economics 17, Tilly, Charles(1985) War making and state making as organized crime. In Bringing the State Back In, ed. Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol (Cambridge Universitry Press) chapter 11 Umbeck, J. R. (1981) Might makes rights: A theory of the formation and initial distribution of property rights. Economic Inquiry 19(1), Voigtländer, Nico, and Hans-Joachim Voth (2012) Persecution perpetuated: The medieval origins of anti-semitic violence in nazi germany. Quartely Journal of Economics 127(3),