War Signals: A Theory of Trade, Trust and Conflict

TLDR: In this article, the authors construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade, which bears a set of testable predictions, such as the probability of future conflicts increases after each conflict episode, and that accidental conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts.

Abstract: We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabitated by two ethnic groups. Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade of the other group. Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade. Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation. The theory bears a set of testable predictions. First, war is a stochastic process whose frequency depends on the state of endogenous beliefs. Second, the probability of future conflicts increases after each conflict episode. Third, "accidental" conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts (a war trap). The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs. Coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.

Figures

Table 2: Persistence of civil con icts and correlation between con ict and lagged trust (frequency: ve-years).

Figure 6: Law of motion of beliefs; the case with two traps.

Figure 5: Surplus from trade and war bene ts; the case of two traps.

Figure 2: Stochastic law of motion of beliefs.

Table 3: Persistence of civil con icts and correlation between con ict and lagged trust (frequency: annual).

Figure 4: Trade surplus with di¤erent proportion of informed players, :

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Year:2013
Warsignals:atheoryoftrade,trustandconict
Rohner,Dominic;Thoenig,Mathias;Zilibotti,Fabrizio
Abstract:Weconstructatheoryofpersistentcivilconicts,wherepersistenceisdrivenbytheendogenous
dynamicsofinter-ethnictrustandtrade.Intimesofpeace,agentsbelongingtotwogroupsarerandomly
matchedtotradebilaterally.Tradehingesontrustandcooperation.Theonsetofconictsignalsthatthe
aggressorhasalowpropensitytocooperate,harmingfuturetrustandtrade.Agentsobservethehistoryof
conictsandupdatetheirbeliefsovertime.Thetheorypredictsthatcivilwarsarepersistent.Moreover,
evenaccidentalconictsthatdonotreecteconomicfundamentalserodetrust,andcanplungeasociety
intoaviciouscycleofrecurrentconicts(awartrap).Theincidenceofconictcanbereducedbypolicies
abatingculturalbarriers,fosteringinter-ethnictradeandhumancapital,andshiftingbeliefs.Coercive
peacepolicies,suchaspeacekeepingforcesorexternallyimposedregimechanges,havenoenduringeects.
DOI:https://doi.org/10.1093/restud/rdt003
PostedattheZurichOpenRepositoryandArchive,UniversityofZurich
ZORAURL:https://doi.org/10.5167/uzh-91321
JournalArticle
AcceptedVersion
Originallypublishedat:
Rohner,Dominic;Thoenig,Mathias;Zilibotti,Fabrizio(2013).Warsignals:atheoryoftrade,trustand
conict.ReviewofEconomicStudies,80(3):1114-1147.
DOI:https://doi.org/10.1093/restud/rdt003

War Signals: A Theory of Trade, Trust and Con‡ict

Dominic Rohner
y
, Mathias Thoenig
z
, Fabrizio Zilibotti
x
This version: December 2012
First version: July 2011
Abstract
We construct a theory of persistent civil con‡icts, where persistence is driven by the endogenous
dynamics of inter-ethnic trust and trade. In times of peace, agents belonging to two groups are
randomly matched to trade bilaterally. Trade hinges on trust and cooperation. The onset of con‡ict
signals that the aggressor has a low propensity to cooperate, harming future trust and trade. Agents
observe the history of con‡icts and update their beliefs over time. The theory predicts that civil
wars are persistent. Moreover, even accidental con‡icts that do not re‡ect economic fundamentals
erode trust, and can plunge a society into a vicious cycle of recurrent con‡icts (a war trap). The
incidence of con‡ict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade
and human capital, and shifting beliefs. Coercive peace policies, such as peacekeeping forces or
externally imposed regime changes, have no enduring e¤ects.
JEL classi…cation: D74, D83, O15, Q34.
Keywords: beliefs, civil war, con‡ict, cooperation, cultural transmission, ethnic fractionaliza-
tion, human capital, learning, matching, peacekeeping, stochastic war, strategic complementarity,
stag hunt game, trade.

For comments on this paper, we are grateful to Philipp Kircher, the editor, three anonymous referees, and Daron
Acemoglu, Philippe Aghion, Alberto Alesina, Roland Benabou, Joan Esteban, Julien Hugonnier, Massimo Morelli, Jody
Ono, Gerard Padro i Miquel, Maria Saez-Marti, Gilles Saint-Paul, Pierre Yared, as well as conference participants
at the CEPR conference on Political Economy of Development, NBER Summer Institute, Nemmers Prize conference,
IAE concentration on con‡ict, SED annual meeting, and seminar participants at CREi, Paris School of Economics,
SciencesPo Paris, Tilburg University, Toulouse School of Economics, University of Geneva, University of Lausanne,
University of Oslo, and University of Zurich. Dominic Rohner acknowledges …nancial support from the Swiss National
Science Foundation (grant no. 100014-122636). Mathias Thoenig acknowledges …nancial support from the ERC Starting
Grant GRIEVANCES-313327. Fabrizio Zilibotti acknowledges …nancial support from the ERC Advanced Grant IPCDP-
229883.
y
Department of Economics, University of Lausanne. Email: dominic.rohner@unil.ch.
z
Department of Economics, University of Lausanne. Email: mathias.thoenig@unil.ch.
x
Department of Economics, University of Zurich. Email: fabrizio.zilibotti@econ.uzh.ch.
1

1 Introduction
More that 16 million people are estimated to have died because of civil con‡icts in the second half of
the 20th century (Fearon and Laitin, 2003). Civil con‡icts are persistent: 68 percent of all outbreaks
took place in countries where multiple con‡icts were recorded (Collier and Hoe-er, 2004). DeRouen
and Bercovitch (2008) document that more than three quarters of all civil wars stem from enduring
rivalries among ethnic groups that enter repeatedly into con‡icts with each other. Weak institutions
likely are part of the explanation, but are not the sole cause. Democracy, for instance, appears to
have no systematic e¤ect on the risk of civil war after controlling for other factors such as ethnic
diversity, GDP per capita and natural resource abundance.
1
Moreover, several developing countries
with relatively solid institutions experience recurrent con‡icts, whereas some other countries with
weak institutions and deep ethnic cleavages never see civil con‡icts.
2
In this paper, we propose a theory arguing that trust is a main determinant of civil con‡ict, and
that inter-ethnic trade is the channel linking the dynamics of trust and con‡ict. On the one hand,
con‡ict disrupts business relationships among the groups involved. A thriving inter-ethnic trade,
therefore, deters war by raising the opportunity cost of war. On the other hand, trade hinges on
trust, since inter-ethnic partnerships (e.g., seller-buyer, employer-employee, supplier-producer, lender-
borrower relationships) typically go beyond spot transactions. By fostering trade, trust deters civil
con‡ict.
We formalize our ideas through a dynamic model in which agents belonging to two ethnic groups
are randomly matched to engage in bilateral partnerships (trade), which we model as a variant of
the classic stag hunt game augmented with individual heterogeneity in the propensities to cooperate.
There are strategic complementarities: the proportion of cooperators in each group increases in the
perceived trustworthiness of the other group. Over time, beliefs get updated based on public signals
(and, in an extension, on private information acquired by traders) and transmitted across generations.
Finally, one group can wage war against the other, at the cost of destroying trade in the current
period. Con‡ict undermines future trust by signaling to the victimized group that the aggressor has
a low propensity to trade cooperatively. Thus, a war today carries the seed of distrust and future
con‡ict.
The theory yields two main predictions that are borne out in the data. First, civil wars are
persistent: each outbreak of con‡ict increases the probability that a country will fall again into civil
war in the future. Imperfect and, possibly, incorrect learning is the source of endogenous persistence.
Second, trust is negatively correlated with civil con‡ict. The causation runs both ways: war causes
1
See, e.g., Fearon and Laitin (2003), Collier an Hoe-er (2004), Montalvo and Reynal-Querol (2005), Collier and
Rohner (2008), Collier et al. (2009), and Esteban et al. (2012).
2
Columbia, India, Turkey, Sri Lanka and the Philippines fare relatively well in terms of democracy and other insti-
tutional indicators, conditional on their stage of development. Yet, they are prone to civil con‡icts. Interestingly, these
countries have a lower average level of trust than the average non-OECD country (0.16 vs. 0.22). On the opposite
front, Bhutan, Cameroon, Gabon, Kazahstan, Togo, China and Vietnam have low scores on democracy and high ethnic
fractionalization, but no recent history of civil war. Data on trust are available only for China and Vietnam among these
countries. Their average trust is 0.51, even larger than in the average OECD country.

trust and trade to plummet; conversely, low trust and scant inter-ethnic trade increase the probability
of future wars. "Accidental wars", e.g., aggressions initiated by a belligerent minority of a group,
or con‡icts triggered by exogenous factors (such as a lower threat of international sanctions against
aggressors) may lead to the permanent breakdown of peace (a war trap). War traps are characterized
by endemic con‡ict and low inter-ethnic cooperation even during peace spells.
In the benchmark model, we introduce a number of simpli…cations to achieve a sharp characteri-
zation of the dynamic equilibrium. In section 6 we relax some of the assumptions. First, we consider
shocks a¤ecting over time the groups’ propensity to cooperate. Second, we extend the analysis to
a richer and more realistic information setting where traders acquire private information throughout
their business experience about the other group’s type. These and other extensions show that war
traps is a robust result. In addition war cycles, i.e., periods of endemic recurrent wars followed by
more peaceful periods, can arise.
The analysis yields a number of policy implications. First, policies increasing the pro…tability
of inter-ethnic trade reduce the incidence of con‡ict. Examples include policies abating barriers,
such as educational policies promoting the knowledge of several national languages, or subsidies for
human-capital investments. Second, policies directly targeting people’s held beliefs may be useful.
These include educational campaigns promoting civic values and cross-group empathy, as well as
repressive interventions outlawing the di¤usion of hateful messages demonizing other groups. Likewise,
interventions designed to nurture and foster cohesive values (e.g., national over ethnic identity) can be
important. Credible campaigns documenting and publicizing success stories of inter-ethnic business
relationships, joint ventures, and so on, are other relevant examples. On the contrary, attempts
to impose peace through coercion – e.g., peacekeeping forces or externally-imposed regime changes –
ultimately have no persistent e¤ects, especially if they fail to restore trade links. Forcing the separation
of groups may even be harmful, since such measures would sti‡e any potential for trade cooperation
which otherwise may emerge during peace spells, and which over time may slowly restore con…dence.
These predictions are consistent with empirical studies in the con‡ict literature, which we discuss in
more detail below.
1.1 Motivating evidence
We start by documenting that con‡icts are highly persistent. We construct an indicator of civil war
incidence taking on the unit value in each …ve-year interval during which a country experiences a civil
con‡ict causing at least twenty-…ve casualties in a single year. The source data (originally at the
annual level) are from the "UCDP/PRIO Armed Con‡ict Dataset" (UCDP, 2012).
3
We use a panel
of 174 countries in the sample period 1949-2008. We run an autoregressive pooled logit regression of
civil war incidence on its lagged value. Table 1 reports the marginal e¤ects of the main variables of
interest. The webpage Appendix A provides the complete set of regression results.
We …nd that a country experiencing war in the …ve-year period t has a 36 percentage points higher
3
This dataset has been used, among others, by Besley and Persson (2011) and Esteban et al. (2012).
2

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
War (t-1)
0.36***
0.22***
0.30***
0.17***
0.32***
0.17***
0.24***
0.10
0.24***
0.05
(0.01)
(0.01)
(0.02)
(0.01)
(0.02)
(0.02)
(0.04)
(0.07)
(0.02)
(0.04)
Trust (t-1)
-0.37*
-0.56***
-0.48***
-0.46***
(0.21)
(0.20)
(0.08)
(0.17)
Conflicts coded as war
>25 Fat.
>1000 Fat.
>25 Fat.
>1000 Fat.
>25 Fat.
>1000 Fat.
>25 Fat.
>1000 Fat.
>25 Fat.
>1000 Fat.
Controls
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Sample
All
All
All
All
WVS
WVS
WVS
WVS
WVS
WVS
Observations
1426
1426
1026
939
409
378
101
101
564
439
Pseudo R-squared
0.304
0.322
0.363
0.358
0.460
0.392
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 5-6 restrict the sample to only the 61 countries for which at least one trust observation is available.
Columns 9-10 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.
Table 1: Persistence of civil con‡icts and correlation between con‡ict and lagged trust (frequency: …ve-years).
probability of experiencing war in the …ve-year period t than a country that did not experience war
at period t  1 (column 1). The autoregressive coe¢cient is highly signi…cant (>1%). We see similar
results if we code as civil wars only con‡icts causing at least a thousand fatalities in a single year
(column 2). Since the persistence in con‡ict could be driven by persistent di¤erences in institutional
or political factors, we add controls for a standard set of explanatory variables used in the con‡ict
literature; 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).
In particular, we control for an index of democracy, natural resources (oil), population, an index
of ethnic fractionalization, geography (i.e., the proportion of mountainous terrain and a dummy for
non-contiguous states), and the lagged GDP per capita. In addition, we control for time dummies
and regional …xed e¤ects. The marginal e¤ects are a¤ected only slightly by the control variables, and
remain highly statistically signi…cant (columns 3 and 4). The results are robust also to country …xed
e¤ects (see Table 2, columns 11-12 in Appendix A), which absorb the e¤ect of any time invariant
heterogeneity, consistent with the results of Martin et al. (2008b). Therefore, the result is not driven
by persistent di¤erences in institutional factors that make some countries more prone to war.
Next, we document that civil war incidence is negatively correlated with a lagged measure of trust
from the World Values Survey (2011). Trust is measured by the proportion of respondents answering
"Most people can be trusted" to the question: "Generally speaking, would you say that most people
can be trusted or that you need to be very careful in dealing with people?" (A165).
4
This is a
coarse measure from our perspective, since it does not focus speci…cally on the inter-ethnic dimension.
However, we expect it to be positively correlated with inter-ethnic trust. Lagged trust is coded as
the average trust level across all World Values Survey (WVS) observations available in the …ve-year
4
In our sample, an average 27.5% of all respondents in a given country and …ve year period declare that they generally
trust others (with a s.d. of 15.0%). Moreover, 23.2% of country …ve year period observations experience either a minor
or a major con‡ict, whereas only 9.7% of all country …ve year periods experience a major war.
3

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "War signals: a theory of trade, trust and con‡ict" ?

Rohner et al. this paper proposed a theory of persistent civil conflicts, where persistence is driven by the endogenous dynamics of inter-ethnic trust and trade. 

Q2. What future works have the authors mentioned in the paper "War signals: a theory of trade, trust and con‡ict" ?

Studying these interconnections is left to future research.