Abstracts of selected publications.
"Globalization and Insecurity: Reviewing
Some Basic Issues," in G. D. Hess (ed.)
Guns and Butter: The Economic Causes and
Consequences of Conflict, Cambridge,
MA: MIT Press, with
Stergios Skaperdas and Constantinos Syropoulos
(June 2009). 
We argue that the costs of domestic
and transnational insecurity are large and economically
significant and that they may vary with the trade regime
of a country. Then, in evaluating trade regimes, the gains
from trade need to be weighed against the change in the
security costs they induce. Within a simple model of trade,
small countries that import a contested resource unambiguously
gain from free trade. However, exporters of a contested
resource incur additional security costs that are higher
than the gains from trade compared to autarky, as long as
the international price of the contested resource is not too high.
We conclude with a discussion of how domestic and transnational
governance could reduce insecurity.
"Globalization and Domestic Conflict,"
Journal of International Economics, with
Stergios Skaperdas and Constantinos Syropoulos
(December 2008).
We examine how globalization affects
trade patterns and welfare when conflict prevails
domestically. We do so in a simple model of trade,
in which a natural resource like oil is contested by
competing groups using real resources ("guns"). Thus,
conflict is viewed as ultimately stemming from imperfect
property-rights enforcement. When comparing autarky
with free trade in such a setting, the gains from
trade have to be weighed against the possibly higher
resource costs of conflict. We find that importers of
the contested resource gain unambiguously. By contrast,
exporters of the contested resource lose under free
trade, unless the world price of the resource is
sufficiently high. Regardless of what price obtains
in the world market, countries tend to over-export
the contested resource relative to what we would
observe if there were no conflict; for some range
of prices, the presence of conflict even reverses
the country's comparative advantage. For an even wider
range of prices, an increase in the international
price of the contested resource reduces welfare,
an instance of the "natural resource curse."
"Economics of Conflict: An Overview," in T. Sandler
and K. Hartley (eds.), Handbook of Defense Economics,
Vol. 2 chapter 22, with Stergios Skaperdas, (Amsterdam:
North Holland, 2007).
In this paper, we review the recent
literature on conflict and appropriation. Allowing
for the possibility of conflict, which amounts to
recognizing the possibility that property rights are
not perfectly and costlessly enforced, represents a
significant departure from the traditional paradigm
of economics. The research we emphasize, however,
takes an economic perspective. Specifically, it
applies conventional optimization techniques and
game-theoretic tools to study the allocation of
resources among competing activities—productive
and otherwise appropriative, such as grabbing the
product and wealth of others as well as defending
one's own product and wealth. In contrast to other
economic activities in which inputs are combined
cooperatively through production functions, the
inputs to appropriation are combined adversarially
through technologies of conflict. A central objective
of this research is to identify the effects of
conflict on economic outcomes: the determinants of
the distribution of output (or power) and how an
individual party's share can be inversely related to
its marginal productivity; when settlement in the
shadow of conflict and when open conflict can be
expected to occur, with longer time horizons capable
of inducing conflict instead of settlement; how
conflict and appropriation can reduce the appeal of
trade; the determinants of alliance formation and the
importance of intra-alliance commitments; how dynamic
incentives for capital accumulation and innovation
are distorted in the presence of conflict; and the
role of governance in conflict management.
"Stable Alliance Formation in
Distributional Conflict," European Journal of
Political Economy (November 2004).
This paper develops a positive analysis of
alliance formation that builds on a simple economic
model featuring a "winner-take-all" contest for
control of some resource. When an alliance forms,
members pool their efforts in that contest and, if
successful, apply the resource to a joint production
process. The analysis does not assume that the
alliance has some special advantage in the conflict
or that the joint production process exhibits
increasing returns. Nor is there any presumption that
peace prevails among the alliance members. In this
setting, the analysis finds that, due to the familiar
free-rider problem, the formation of alliances tends
to reduce the severity of the conflict over the
contestable resource. Furthermore, despite the
internal conflict that arises among the winning
alliance's members over the distribution of their
joint product, under reasonable conditions this
effect alone is sufficient to support stable alliance
formation in a noncooperative equilibrium.
"Global Threats and the Domestic
Struggle for Power," European Journal of
Political Economy (June 2004). Reprinted
in The Economic Analysis of Terrorism
edited by Tilman Brück (London: Routledge, 2007).
This paper considers an economy where
groups compete in a contest for power to redistribute
future income in their favor. An increased external
threat of terrorism---either an increase in the
likelihood of a successful terrorist attack or a
greater loss of income in the event of a successful
attack---would tend to reduce the expected value of
the contest prize and thus lessen the severity of the
conflict at home. However, unless the marginal return
from guarding against terrorism is not too large or
diminishes at a sufficiently fast rate, such a shock
could imply, in equilibrium, both a greater sense of
security among the groups against external threats
and a greater conflict between them in the domestic
struggle for power.
"On the Stability of Group Formation:
Managing the Conflict Within," Conflict
Management and Peace Science (Spring 2004).
This paper develops a positive analysis of
group formation, highlighting the role of conflict
management within the group. The analysis builds on a
simple economic model that features a
"winner-take-all" contest for control of some
resource. When a group forms, members pool their
endowed resource to secure the contestable resource,
which if successful is then applied to a joint
production process. While reducing the severity of
conflict over the contestable resource, the formation
of groups adds another layer of conflict--that is, a
conflict among the members of the winning group over
the distribution of their product. The effectiveness
of conflict management in enabling groups to resolve
this second layer of conflict in more "civilized"
ways has some important implications for the
equilibrium structure of groups as well as for the
allocation of resources.
"Conflict Without Misperceptions or
Incomplete Information: How the Future Matters,"
Journal of Conflict Resolution, with Stergios
Skaperdas (December
2000).
Conflict and war are typically viewed as
the outcome of misperceptions, incomplete
information, or even irrationality. We show that it
can be otherwise. Despite the short-run incentives to
settle disputes peacefully, there can be long-term,
compounding rewards to going to war when doing better
relative to one's opponent today implies doing better
tomorrow. Peaceful settlement involves not only
sharing the pie available today but also foregoing
the possibility, brought about by war, of gaining a
permanent advantage over one's opponent into the
future. We show how war emerges as an equilibrium
outcome in a model that takes these considerations
into account. War is more likely to occur, the more
important is the future.
"Political Influence and the Dynamic
Consistency of Policy," American Economic
Review, with Jaewoo Lee (June 2000).
Positive analyses of the credibility
constraint in policy often neglect the fact that
political incentive constraints are also relevant in
understanding observed policies. With a focus on
government tax and spending policies, this paper
identifies an important and positive role for
political constraints given that the credibility
constraint is binding. In particular, while other
analyses find that either the credibility constraint
alone or political incentive constraints alone create
inefficiencies, our analysis shows how political
constraints can weaken the severity of the
credibility constraint, thereby improving the
equilibrium outcome.
"Election Surprises and Exchange Rate
Uncertainty," Economics and Politics,
with Amihai
Glazer and Jaewoo Lee (November 1999).
This paper shows that unexpected election
results explain some of the unexpected variation in
foreign exchange rates. The result is based on an
event study which examines the behavior of the size
of forecast errors implied by futures contracts for
exchange rates around elections. Though elections can
produce large unexpected effects on exchange rates,
the effects on forecast errors are short-lived.
"Protecting the Military,"
Southern Economic Journal, with
Deborah Bielling (April 1997).
This paper analyzes the equilibrium
adjustment of labor resources following a favorable
shock that lowers the marginal benefits of security
provided by military employees. A key feature of this
model is that moving between sectors is costly, but
the total adjustment cost borne by an individual can
be reduced if he/she prepares for relocation in
advance. Nevertheless, because preparation itself
involves some cost, workers will take the necessary
steps only if the government's announcement of
cutting military employment (or base closures) is
sufficiently credible. The government optimally
chooses military employment to balance the benefits
of reducing the tax burden while increasing aggregate
consumption opportunities against the distributional
effects that arise from costly relocation. The
analysis shows that an announcement involving the
cuts in military employment which solves the
government's optimization problem if precommitments
were possible is not credible when policy is set
under discretion. With an expectation that the
government will not cut employment so severely,
military workers have little incentive to prepare for
relocation. In equilibrium, the government fulfills
that expectation by providing a socially excessive
level of protection to military employees.
"Politics With and Without Policy,"
Economics and Politics, with
Amihai Glazer (November 1996).
When strategic complementarities lead to
the existence of multiple equilibria, a change in
control of government may lead to changes in economic
behavior by consumers or firms even if the different
parties pursue the same policies. The existence of
multiple equilibria, however, is not necessary to
predict partisan effects. Furthermore, electoral
uncertainty is not necessary to predict such effects;
indeed, such uncertainty can dampen the electoral
cycle.
"The Information Content of the
Federal Funds Rate," Journal of Money, Credit and
Banking, with Daniel
Thornton (August 1995).
Market efficiency suggests that the
federal funds rate should not contain unique
information about monetary policy. Taking as given
that the federal funds rate may be a "good" indicator
of monetary policy, this paper presents evidence that
this rate is no better an indicator of monetary
policy than other short-term interest
rates--specifically, the overnight RP and three-month
T-Bill rates.
"When and How Much to Talk:
Credibility and Flexibility in Monetary Policy with
Private Information," Journal of Monetary
Economics, with Seonghwan
Oh (April 1995).
This paper analyzes the role of noisy or
imprecise announcements in mitigating the basic
credibility problem in monetary policy. Based on a
model where the monetary authority's private
information gives rise to an unavoidable trade-off
between flexibility and credibility, the analysis
finds that noisy announcements can serve as a
meaningful form of communication to make that
trade-off more favorable. However, such talk is not
cheap. The analysis predicts that those central banks
who can speak more precisely are those who are less
likely to speak at all.
"Domestic Politics and International
Conflict," American Economic Review
(December 1994).
This paper explores the interactions
between domestic politics and international conflict.
The analysis shows that electoral uncertainty
associated with competition between political
parties, each representing a specific group of the
electorate, imparts a negative "bias" on the nation's
military spending, given military spending by other
nations. In turn, uncertainty lowers other nations'
incentive to arm as well. In this context, democratic
institutions can be thought of as a possible
precommitment mechanism that reduces the severity of
conflict between nations, thereby increasing the
amount of resources available globally for
consumption.
"Does Electoral Uncertainty Cause
Economic Fluctuations?" American Economic Review
Papers and Proceedings, with Amihai
Glazer (May 1994).
This paper questions the importance of
electoral uncertainty in understanding economic
fluctuations. An analysis of data on wage contracts
identifies a tendency for economic agents to postpone
contract negotiations until after an upcoming
election. This observed tendency suggests that the
rational-partisan theory, which treats the timing of
contract negotiations as fixed, overstates the
importance of uncertainty about future election
outcomes.
"Strategic Discipline in Monetary
Policy with Private Information: Optimal Targeting
Horizons," American Economic Review, with
Seonghwan Oh (March
1993).
This paper analyzes a multi-period
monetary targeting procedure as a possible resolution
to the credibility problem in policy when the
monetary authority has some private information. As
the length of the targeting horizon decreases, the
severity of the credibility problem falls, but at the
expense of weakening the monetary authority's ability
to pursue its stabilization goals. Based on model
simulations, the analysis studies the determinants of
the optimal targeting horizon that balances the
benefits of flexibility and discipline in policy.
"Arming as a Strategic Investment in a
Cooperative Equilibrium," American Economic
Review (March 1990).
This paper develops a positive theory of
military spending on armaments. Based on a
game-theoretic model of international conflict in
which consumption, peaceful investment and military
spending are endogenously determined, the analysis
illustrates that when there is repeated interaction
between nations, a game of threats and punishments
generally will not support a disarmament outcome and
that fluctuations in military spending can be an
endogenous result of fluctuations in aggregate
economic activity. Furthermore, the analysis shows
how the relation between aggregate economic activity
and military spending qualitatively depends on
whether governments are acting opportunistically or
"cooperatively."
"The Role of the Military Draft in
Optimal Fiscal Policy," Southern Economic
Journal (January 1990).
This paper extends Lucas and Stokey's [JME
(1983)] general equilibrium model of optimal fiscal
policy in which the government can obtain resources
from the economy by taxing income and borrowing to
study the optimality of conscription of labor as an
additional means to mobilize the economy. Although
conscription generates a deadweight loss, it can be a
part of the optimal fiscal policy when exogenously
given government spending is temporarily and
extremely high---i.e., during large scale wars. The
intuition underlying this result is that the
government trades off the distortions arising from
the military draft against those arising from the
income tax. U.S. data from 1941 to 1973 are
consistent with the theory's prediction that,
controlling for government expenditures, marginal tax
rates and the number of draftees as a fraction of the
adult population are negatively related. Moreover,
the analysis shows that, to the extent that the draft
can reduce the burden of explicit income taxation
associated with a given level of government
consumption, the draft serves as a partial substitute
for debt creation as well as income taxation in
optimal fiscal policy. Simulations indicate that the
time-series behavior of aggregate consumption, income
taxes and outstanding debt will depend on whether the
draft is a feasible (in a political sense perhaps,
but as assumed in the model) tool for government
finance. The analysis suggests, then, that the common
practice in time-series analyses of discarding
wartime data (i.e., the two world wars) is not only
an inefficient use of data, but also might produce
misleading empirical results.
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