Michelle R. Garfinkel


Research.


Current working papers.

"Prudence versus Predation and the Gains from Trade," with Constantinos Syropoulos and Thomas Zylkin (July 2021). floppy

We analyze a dynamic, two-country model that highlights the various trade-offs each country faces between current consumption and competing investments in its future productive and military capacities as it prepares for a possible future conflict. Our focus is on the circumstances under which the effects of current trade between the two countries on the future balance of power render trade unappealing to one of them. We find that a positive probability of future conflict induces the country with less resource wealth to ''prey'' on the relatively more ''prudent'' behavior of its richer rival, and more so as conflict becomes more likely. While a shift from autarky to trade always raises the current incomes of both countries, the poorer country realizes the relatively larger income gain from trade and also devotes a relatively larger share of its income gain towards arming. Consequently, the richer country rationally chooses not to trade today when the difference in initial resource wealth is sufficiently large and is more likely to prefer autarky when the probability of future conflict is higher.

"On Trade and the Stability of Peace," with Constantinos Syropoulos (September 2020). floppy

We consider an environment in which two sovereign states with overlapping ownership claims on a resource/asset first arm and then choose whether to resolve their dispute violently through war or peacefully through settlement. Both approaches depend on the states' military capacities, but have very different outcomes. War precludes trade between the two states and can be destructive; however, once a winner is declared, arming is unnecessary in future periods. By contrast, a peaceful resolution under the threat of war today avoids destruction and supports mutually advantageous trade; yet, settlements must be renegotiated and that could require countries to arm in future periods as well as in the current period, whereby they can resolve their ongoing dispute. In this setting, we explore the conditions under which peace arises as the perfectly coalition-proof equilibrium over time. We find that, depending on the destructiveness of war, time preferences, and the initial distribution of resource endowments, greater gains from trade can reduce arming and pacify international tensions. Even when the gains from trade are relatively small, peace might be sustainable, but only for more uneven distributions.


Abstracts of selected publications.

"Self-Enforcing Peace Agreements that Preserve the Status Quo," Games and Economic Behavior, with Constantinos Syropoulos (November 2021). floppy

On the basis of a single-period, guns-versus-butter, complete-information model in which two agents dispute control over an insecure portion of their combined output, we study the choice between a peace agreement that maintains the status quo without arming (or unarmed peace) and open conflict (or war) that is possibly destructive. With a focus on outcomes that are immune to both unilateral deviations and coalitional deviations, we find that, depending on war's destructive effects, the degree of output security and the initial distribution of resources, peace can, but need not necessarily, emerge in equilibrium. We also find that, ex ante resource transfers without commitments can improve the prospects for peace, but only when the configuration of parameters describing the degree of output security and the degree of war's destruction ensures the possibility of peace without such transfers at least for some sufficiently even initial resource distributions.

"Inequality and Conflict: Burning Resources to Support Peace," Economics Letters, with Constantinos Syropoulos (December 2020). floppy

We consider a simple, guns-versus-butter model in which agents choose between ``war'' and ``peace'' to study the implications of inequality in resource ownership for equilibrium outcomes. Provided war is destructive, peace can emerge as the stable equilibrium, but only if the distribution of resource ownership is sufficiently even. We establish that, when this condition fails, the richer agent can destroy a portion of its resource endowment to even out the ex post distribution and thereby support peace. We also examine the importance of ex ante resource transfers and show that they are Pareto superior to burning resources.

"Arming in the Global Economy: The Importance of Trade with Enemies and Friends," Journal of International Economics, with Constantinos Syropoulos and Yoto V. Yotov (March 2020). floppy

We analyze how trade openness matters for interstate conflict over productive resources. Our analysis features a terms-of-trade channel that makes security policies trade-regime dependent. Specifically, trade between two adversaries reduces each one's incentive to arm given the opponent's arming. If these countries have a sufficiently similar mix of initial resource endowments, greater trade openness brings with it a reduction in resources diverted to conflict and thus wasted, as well as the familiar gains from trade. Although a move to trade can otherwise induce greater arming by one country and thus need not be welfare improving for both, aggregate arming falls. By contrast, when the two adversaries do not trade with each other but instead trade with a third (friendly) country, a move from autarky to trade intensifies conflict between the two adversaries, inducing greater arming. With data from the years surrounding the end of the Cold War, we exploit the contrasting implications of trade costs between enemies versus trade costs between friends to provide some suggestive evidence in support of the theory.

"Problems of Commitment in Arming and War: How Insecurity and Destruction Matter," Public Choice, with Constantinos Syropoulos (March 2019). floppy

This paper analyzes a guns-versus-butter model in which two agents compete for control over an insecure portion of their combined output. They can resolve this dispute either peacefully through settlement or by military force through open conflict (war). Both types of conflict resolution depend on the agents' arming choices, but only war is destructive. We find that, insofar as entering into binding contracts on arms is not possible and agents must arm even under settlement to secure a bigger share of the contested output, the absence of long-term commitments need not be essential in understanding the outbreak of destructive war. Instead, the ability to make short-term commitments could induce war. More generally, our analysis highlights how the pattern of war's destructive effects, the degree of output security and the initial distribution of resources matter for arming decisions and the choice between peace and war. We also explore the implications of transfers for peace.

"Rules for Dividing a Disputed Resource in the Context of the Classical Liberal Argument for Peace," Peace Economics, Peace Science and Public Policy, with Constantinos Syropoulos, (February 2018). floppy

In this paper, we study alternative forms of conflict resolution, both peaceful and non-peaceful, between two countries that compete for claims to a resource used to produce potentially traded goods. Consistent with the classical liberal argument, peace supports mutually beneficial trade, whereas war preempts it. War always induces countries to allocate resources into non-contractible arming ("guns") for superiority in conflict. Under peaceful settlement, countries might choose to arm as well for gaining leverage in negotiations, but arming is typically less than what it is under war. Building on the observation that arming itself affects the countries' bargaining sets, we compare the efficiency properties of division rules generated by three prominent bargaining solutions -- namely, splitting the surplus, equal sacrifice, and Nash bargaining -- and show how they depend on the gains from trade.

"Trade Openness and the Settlement of Domestic Disputes in the Shadow of the Future," Research in Economics, with Constantinos Syropoulos (June 2015). floppy

We explore the severity of an ongoing dispute over a productive resource within a country that participates in world trade. In addition to arming, the contending groups in our setting choose either to engage in destructive conflict or to settle their dispute peacefully. Our central objective is to characterize the conditions under which the dispute might be resolved peacefully instead of violently. The analysis underscores the intuitive roles played by the destructiveness of open conflict and the salience of the future that have been identified in the previous literature, but it also provides some novel insights into how world prices and trade openness matter. Among other things, we find that, given conflict's destructive effects and time preferences, settlement is most likely to be supported as a stable equilibrium when the "traditional" gains from trade are largest. However, there also exist circumstances under which increased trade openness can induce destructive conflict.

"Trade and Insecure Resources," Journal of International Economics, with Stergios Skaperdas and Constantinos Syropoulos (January 2015). floppy

We construct a model of conflict and trade to study the consequences of interstate disputes over contested resources (land, oil, water or other resources) for arming, welfare and trade flows. Different trade regimes imply different costs of such disputes in terms of arming. Depending on world prices, free trade can intensify arming to such an extent that the additional security costs it brings swamp the traditional gains from trade and thus render autarky more desirable for one or all rival states. Free trade, though, is always an equilibrium, and sometimes is a dominant one with features of a prisoner's dilemma outcome. Furthermore, contestation of resources can reverse a country's apparent comparative advantage relative to its comparative advantage in the absence of conflict. And, where such conflict is present, comparisons of autarkic prices to world prices could be inaccurate predictors of trade patterns.

"Governance and Norms as Determinants of Arming," Revue d'Economie Politique, with Michael McBride and Stergios Skaperdas (March-April 2012). floppy

In this paper, we explore two factors that can limit arming and, more generally, the costs of enforcement within and across states: governance or the formal organizations and institutions that help define and enforce property rights, and norms, or the informal arrangements in settling potential disputes. We examine the effects of these two factors in a simple static contest model, in which two sides choose levels of arming and whether to engage in actual conflict or settle in the shadow of conflict. We show how arming critically depends on both governance and norms, and therefore how societies with potentially conflictual relations can make either high or low levels of expenditures on security without any difference in the levels of security they actually enjoy. We also explore how investments in governance can reduce arming.

"Political Institutions and War Initiation: The Democratic Peace Hypothesis Revisited," in M.R. Garfinkel and S. Skaperdas (eds), Oxford Handbook of the Economics of Peace and Conflict, NY: Oxford University Press (March 2012). floppy

This chapter analyzes the influence of democratic institutions---specifically, the effects of (i) electoral uncertainty when individuals within a nation have different preferences over public peaceful investment and (ii) greater checks and balances that lead to a more effective mobilization of resources for both public peaceful investment and arming---on a nation's incentive to arm and willingness to initiate war. The analysis is based on a model where nations contest some given resource and where they cannot commit to their future allocations to arming; yet, the victor in a conflict today gains an advantage in future conflict and thus realizes a savings in future arming. These assumptions imply that, despite the short-term incentives to settle peacefully, one or both nations might choose to initiate war. In such a setting, electoral uncertainty tends to make a democracy more peaceful relative to an autocracy, whereas greater checks and balances tend to make a democracy less peaceful. Thus, while two democracies might be more peaceful than two autocracies when paired against each other in a contest over a given resource, this is not necessarily the case. Even under conditions where democracies are most likely to be peaceful with one another, democracies are at least as likely to be in war with autocracies as autocracies are likely to be in war each other.

"Trade in the Shadow of Power," in M.R. Garfinkel and S. Skaperdas (eds), Oxford Handbook of the Economics of Peace and Conflict, NY: Oxford University Press, with Stergios Skaperdas and Constantinos Syropoulos (March 2012). floppy

In this chapter, we examine how some of the main results in international trade theory fare when we abandon the traditional assumption of third-party enforcement of property rights. Without such enforcement, countries arm and exercise power to secure resources used in production or to secure the output from that production. Because arming is endogenous and takes scarce resources to produce, the production of final goods is also endogenous. Consequently, prices in either domestic or international markets reflect not only preferences, endowments or technologies of production as predicted by traditional models, but also arming and the power that comes from that. As we show in the context of a Ricardian model, those countries that produce the most socially valued goods tend to arm less, giving them a "comparative disadvantage" in power. Accordingly, the level of welfare obtained by these countries could be lower than that obtained in a competitive economy with perfect security. In the context of a Heckscher-Ohlin model, we find that free trade need not be preferred to autarky, as the costs of conflict or self-enforcement swamp the familiar gains from trade for a certain range of world prices. Finally, trade in the shadow of power can distort comparative advantage.

"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). floppy

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). floppy

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). floppy

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). floppy

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). floppy

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). floppy

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). floppy

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). floppy

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). floppy

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.



Edited books.

Oxford Handbook of the Economics of Peace and Conflict, with Stergios Skaperdas (NY: Oxford University Press, 2012).

The Political Economy of Conflict and Appropriation, with Stergios Skaperdas (NY: Cambridge University Press, 1996 and 2008)

The Business Cycle: Theory and Evidence. Proceedings of the Sixteenth Annual Policy Conference of the Federal Reserve Bank of St. Louis, with Michael T. Belongia (MA: Kluwer Academic Publishers, 1992).



Federal Reserve publications.

Earlier in my career I published a number of articles that appeared in the Federal Reserve Bank of St. Louis Review on various issues, many related to monetary policy (e.g., inflation, the FOMC, and the monetary base), but others as well. These articles are now available on line through IDEAS on my profile page POP.

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