Abstract

In this paper, I examine whether increasing trade interdependence as part of a peace agreement reduces the likelihood of conflict between two countries that share a history of conflict over territory. I develop a game-theoretic model that incorporates the protection-for-sale model and a conflict model to investigate how interest groups affect their government’s foreign policy. From the game’s subgame perfect equilibrium, I find that signing a free trade agreement minimizes conflict when the welfare of export-oriented groups and the aggregate welfare are maximized under a free-trade agreement with the rival country. I test this result empirically using the Peace Agreements dataset from UCDP, the militarized interstate disputes from the Correlates of War Project, and the gravity dataset from CEPII. I find empirical support to the hypothesis that signing a free trade agreement, along with a peace agreement, minimizes interstate conflicts when export-oriented groups and consumers are in favor of the free trade agreement with the rival country.

(JEL Codes: F51, F53)