How Opportunity Costs Decrease the Probability of War in an Incomplete Information Game

Abstract

This article shows that the opportunity costs resulting from economic interdependence decrease the probability of war in an incomplete information game. This result is strongly consistent with existing empirical analyses of the inverse trade-conflict relationship but is the opposite of the conclusion reached by Gartzke, Li, and Boehmer, who reject the opportunity cost argument in a game-theoretic framework. As a result of our findings, one cannot dismiss the opportunity cost argument as the explanation why trading nations fight less. Instead our study reaffirms the central position of opportunity costs as the basis for the inverse trade-conflict relationship, thus implying that one need not rely on signaling.