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This paper studies gender differences in performance in a male‐dominated competitive environment chess tournaments. We find that the gender composition of chess games affects the behaviors of both men and women in ways that worsen the outcomes for women. Using a unique measure of within‐game quality of play, we show that women make more mistakes when playing against men. Men, however, play equally well against male and female opponents. We also find that men persist longer before losing to women. Our results shed some light on the behavioral changes that lead to differential outcomes when the gender composition of competitions varies.

Dishonesty in communication has important economic implications. The standing literature has shown that lying is less pervasive than predicted by standard economic theory. We explore whether biology can help to explain this behavior. In a sample of men, we study whether masculine traits are related to (dis)honesty in a sender-receiver game. We study three masculine physical traits: the second-to-fourth digit ratio, facial morphometric masculinity and the facial width-to-height ratio. These biomarkers display significant associations with lying and deception in the game. We also explore the extent to which these effects operate through social preferences or through beliefs about the behavior of receivers.

The situation of women in the labor market has changed dramatically since World War II. Cinema has documented the big changes in the participation of women in the labor force and the many difficulties that both white-collar and industrial female workers have encountered in the process. The films about working women are often compelling because they depict courageous characters fighting against traditional gender roles and domesticity expectations. These films have also expressed the anxiety of male audiences and filmmakers toward working women. Inevitably, sex has also formed part of the representation of the role of women in the economy, either through sex workers or through the implicit exchange that working women are expected to put up with in abusive corporate environments.

In cinema, as in life, scarcity shows up everywhere. In the decisions characters face, the time and financial constraints limiting their choices and influencing their relationship with other characters. Economic models and film fictions tell stories about imaginary characters who make decisions over a finite horizon and live finite lives constrained by limited amounts of time and money. This chapter revises the extreme economies portrayed in post-apocalyptic films, dystopian movies, and in Westerns. These genres are the ones that have best-reflected conflicts over scarce resources, the social unrest due to rampant income and wealth inequalities, and the negative economic consequences of the lack of an effective rule of law.

We study theoretically and empirically the redistributive effects of extending voting rights to non-citizens. Our model predicts a tax increase when newly enfranchised voters represent a sufficiently large fraction of voters. We study the 1975 Swedish electoral reform that extended voting rights to non-citizens in municipal elections. In the first term after the reform, there was a tax increase that was not repeated in subsequent terms. This increase was stronger the greater the foreign population in the municipality. This effect was concentrated in municipalities where the size of the non-citizen population was large enough to upturn the previous electoral outcome.

Financial markets have been a very fertile ground for film plots of intrigue and suspense. The trading floor, filled with swarms of brokers frantically buying and selling stocks, is very cinematic. Cinema has often portrayed the stock market as a giant casino where winning and losing millions is just a matter of luck, and traders risk it all by doubling down on their investments. A casino populated by men of dubious morality willing to do anything to make a profit; scammers, tricksters, snake oil salesmen always ready to take advantage of the greedy or the unwary. Individual bankers, in contrast, have received a better treatment in film as key providers of credit to businesses and families.

Cinema influences the way we imagine the future. Dystopian and post-apocalyptic films may contribute to spread the belief that there will be no further progress for humans and that the world cannot be a better place. We even feel childish and naive when we try to imagine a better future. The risk is that the apocalypse may become a self-fulfilling prophecy. But cinema offers us seeds of hope if we look closely enough. Several films have depicted better futures, better economic systems, and fairer societies. The films that we will be discussing in this concluding chapter explore different utopian horizons and discuss the economic and social implications of these alternatives.

In the present paper, we study how the morphological features related to developmental physiology of other participants influence the decision to cooperate in a social dilemma. To that end, we let a large sample of men play a prisoner's dilemma game, both anonymously and against a series of counterparts whose photographs were shown. We focus on three characteristics already linked to cooperative behavior and with described effects on the adult facial shape: facial fluctuating asymmetry, a frequently employed but debated proxy for developmental instability; the degree of facial dimorphism, related to levels of testosterone during puberty; and the second to fourth digit ratio, related to relative prenatal testosterone exposure. We find significantly higher cooperation rates in anonymous interactions than in the non-anonymous round. We also find that individuals are more likely to cooperate with more asymmetric counterparts, and that more asymmetric participants were less likely to believe that their counterpart would cooperate. Variables related to exposure to testosterone during development do not display any effect. We conclude by discussing how out-of-the-game rewards can explain our results.

This article explores the existence and endogeneity of gender differences in strategic behaviour. We report results from two experimental studies employing the beauty contest game, one in the laboratory and one in the classroom. We observe robust and significant gender differences in observed depth of strategic reasoning in favour of men in zero‐stake situations. These differences disappear when a monetary prize is awarded. We also find that females engage in more rounds of reasoning than males when gender and stereotypes are made salient. This effect of priming is driven by females who believe women are superior in the game.

Prosocial third-party punishment (3PP) is a punitive behavior against antisocial individuals, which might explain extended cooperativeness in humans. 3PP shows sexual dimorphism, being more frequent in men than in women. We studied whether sexually dimorphic features related to sexual hormones during development (facial dimorphism and 2D:4D) influence the tendency to engage in 3PP in a sample of 511 women and 328 men. After playing a Prisoner’s Dilemma, participants had to decide whether to penalize the defection of a third player who had exploited his/her counterpart’s cooperation. In line with previous studies, we observe that men are more prone to engage in 3PP than women. We find that this sex difference is due to cooperative men being more likely to punish than cooperative women. In addition, men with higher facial masculinity are less likely to engage in 3PP, whereas no features influence 3PP in women. We discuss the possibility that sex differences in the motivations and fitness implications underlying 3PP might be driving the observed results, Funding from the Spanish Ministry for Science and Innovation (grant ECO2015-66281-P) and from Chilean FONDECYT (Grant No. 1170513) are gratefully acknowledged

We study how the possibility of a conflict between natives and immigrants shapes income redistribution in democracies. Conflict erupts when immigrants are given less than what they could obtain by resorting to confrontation. That in turn can make natives vote for lower tax rates and lower public spending. We show that income redistribution, both vertical (from the rich to the poor) and horizontal (from natives to migrants), decreases with the level of immigration. This is because the threat of conflict intensifies as the migrant population becomes bigger. Inequality softens the effect of immigration on tax rates but reduces horizontal redistribution. Despite the threat of conflict, the welfare of the native population unambiguously increases with the stock of migrants.

Proponents of proportional electoral rules often argue that majority rule depresses turnout and may lower welfare due to the ‘tyranny of the majority’ problem. The present paper studies the impact of electoral rules on turnout and social welfare. We analyze a model of instrumental voting where citizens have private information over their individual cost of voting and over the alternative they prefer. The electoral rule used to select the winning alternative is a combination of majority rule and proportional rule. Results show that the above arguments against majority rule do not hold in this set up. Social welfare and turnout increase with the weight that the electoral rule gives to majority rule in a close election, while they are independent of the electoral rule when the expected size of the minority tends to zero. However, more proportional rules can increase turnout within the minority group; this effect is stronger the smaller the minority group. We provide a general version of the competition effect, i.e. that turnout in close elections is higher than in biased elections, independently of the systems adopted in the two cases.

The present paper analyzes the extent to which attractiveness-related variables affect cooperative behavior in women. Cooperativeness is evaluated through a Prisoner's Dilemma Game (PDG). We consider several morphometric variables related to attractiveness: fluctuating asymmetry (FA), waist–hip ratio (WHR), body mass index (BMI) and facial femininity (FF). These variables have been shown to predict human behavior. We also include as a control variable a score for self-perceived attractiveness (SPA). We test differences in these variables according to behavior in the PDG. Our results reveal that low-FA women cooperate less frequently in the PDG. We also find that women with lower WHR are more cooperative. This result contradicts the expected relation between WHR and behavior in the PDG. We show that this effect of WHR on cooperation operates through its influence on the expectation that participants hold on the cooperative intent of their counterpart. In addition, we show that the effect of attractive features on cooperation occurs independently of the participants' perception of their own appeal. Finally, we discuss our results in the context of the evolution of cooperative behavior and under the hypothesis that attractiveness is a reliable indicator of phenotypic quality.

Biological features and social preferences have been studied separately as factors influencing human strategic behaviour. We run two studies in order to explore the interplay between these two sets of factors. In the first study, we investigate to what extent social preferences may have some biological underpinnings. We use simple one-shot distribution experiments to attribute subjects one out of four types of social preferences: self-interested (SI), competitive (C), inequality averse (IA) and efficiency-seeking (ES). We then investigate whether these four groups display differences in their levels of facial fluctuating asymmetry (FA) and in proxies for exposure to testosterone during phoetal development and puberty. We observe that development-related biological features and social preferences are relatively independent. In the second study, we compare the relative weight of these two set of factors by studying how they affect subjects’ behaviour in the Ultimatum game (UG). We find differences in offers made and rejection rates across the four social preference groups. The effect of social preferences is stronger than the effect of biological features even though the latter is significant. We also report a novel link between facial masculinity (a proxy for exposure to testosterone during puberty) and rejection rates in the UG. Our results suggest that biological features influence behaviour both directly and through their relation with the type of social preferences that individuals hold.

While survey data supports a strong relationship between personality and labor market outcomes, the exact mechanisms behind this association remain unexplored. In this paper, we take advantage of a controlled laboratory set-up to test whether this relationship operates through productivity, and isolate this mechanism from other channels such as bargaining ability or self-selection into jobs. Using a gender neutral real-effort task, we analyse the impact of the Big Five personality traits on performance. We find that more neurotic subjects perform worse, and that more conscientious individuals perform better. These findings are in line with previous survey studies and suggest that at least part of the effect of personality on labor market outcomes operates through productivity. In addition, we find evidence that gender and university major affect the impact of the Big Five personality traits on performance.

Recent research has analyzed how individual characteristics, like the exposure to different hormones and symmetry, affect decision-making and strategic behaviour. The present article investigates the effect of symmetry, of exposure to testosterone (T) in utero and during puberty and of current T on cooperation in a Prisoners' Dilemma Game (PDG). T is a hormone with well known effect on males' behaviour, and that promotes activities that seek to increase reproductive success. Fluctuating Asymmetry (FA) reflects the ability of the organism to maintain a stable development and it is usually employed as a variable reflecting genetic quality (low FA values are thought to signal higher genetic quality). Our results show that subjects with intermediate levels of second to fourth digit ratio (a proxy of exposure to Tin utero) and with high FA cooperate more often in the PDG. We also observe that the latter effect is due to the fact that FA has an impact on subjects' expectations about the behaviour of their counterpart in the game. These results reinforce the described link between markers related to genetic quality and cooperative behaviour. This possible linkage of individual condition and pro-social behaviour in humans clearly merits further attention. (C) 2009 Elsevier Inc. All rights reserved.

This paper investigates the use of conflict as a bargaining instrument. It first revises the arguments explaining the role of confrontation as a source of information and its use during negotiations. Then it offers evidence illustrating this phenomenon by analyzing a sample of colonial and imperial wars. The second part of the paper explores a bargaining model with one-sided incomplete information. Parties can choose the scope of the confrontation they may want to engage in: An absolute conflict that terminates the game or a limited conflict that only introduces delay and conveys information about the eventual outcome of the absolute one. It is shown that confrontation has a double-edged effect: It may paradoxically open the door to agreement when the uninformed party is so optimistic that no agreement is feasible. But it can also create inefficiency when agreement is possible but the informed agent has an incentive to improve her bargaining position by fighting.

We analyze experimentally two sender–receiver games with conflictive preferences. In the first game, the sender can choose to tell the truth, to lie, or to remain silent. The latter strategy is costly. In the second game, the receiver must decide additionally whether or not to costly punish the sender after having observed the history of the game. We investigate the existence of two kinds of social preferences: lying aversion and preference for truth-telling. In the first game, senders tell the truth more often than predicted by the sequential equilibrium analysis, they remain silent frequently, and there exists a positive correlation between the probability of being truthful and the probability of remaining silent. Our main experimental result for the extended game shows that those subjects who punish the sender with a high probability after being deceived are precisely those who send fewer but more truthful messages. Finally, we solve for the Perfect Bayesian Nash Equilibria of a reduced form of the baseline game with two types of senders. The equilibrium predictions obtained suggest that the observed excessive truth-telling in the baseline game can be explained by lying aversion but not by a preference for truth-telling.

Recent literature has emphasized that individuals display varying levels of strategic reasoning. This paper presents ten years worth of experimental data from two countries exploring the existence and endogeneity o f gender differences in strategic sophistication. We report results from two experime ntal studies employing the beauty contest game, one from the classroom and one from the laboratory. We observe robust and signi…cant gender differences in strategic soph istication in favour of men in zero- stake situations. These differences disappear when a monetary prize is awarded. We also …find that depth of strategic reasoning varies with gender priming. Females display signi…cantly higher levels of strategic sop histication than males when gender is made salient. This effect of gender priming is driv en by females who believe women are superior in the game.

There is a growing literature looking at how men and women respond differently to competition. We contribute to this literature by studying gender differences in performance in a high-stakes and male dominated competitive environment, expert chess tournaments. Our findings show that women under-perform compared to men of the same ability and that the gender composition of games drives this effect. Using within player variation in the conditionally random gender of their opponent, we find that women earn significantly worse outcomes against male opponents. We examine the mechanisms through which this effect operates by using a unique measure of within game quality of play. We find that the gender composition effect is driven by women playing worse against men, rather than by men playing better against women. The gender of the opponent does not affect a male player’s quality of play. We also find that men persist longer against women before resigning. These results suggest that the gender composition of competitions affects the behavior of both men and women in ways that are detrimental to the performance of women. Lastly, we study the effect of competitive pressure and find that players’ quality of play deteriorates when stakes increase, though we find no differential effect over the gender composition of games.

This paper analyzes a model where groups can attain exclusive ownership of a resource by means of a contest. We show that more concave production technologies and more egalitarianism within groups induce higher levels of social conflict. We then study endogenous coalition formation. Under cooperative exploitation of the resource, the grand coalition is the efficient partition but there exists a strong tendency toward bipartisan conflicts. Under noncooperative exploitation, conflict can ex ante Pareto dominate peaceful access and it becomes more difficult to support the grand coalition as a stable structure.

International audience; This paper analyzes secession and group formation in the general model of contests due to Esteban and Ray (1999). This model encompasses as special cases rent seeking contests and policy conflicts, where agents lobby over the choice of a policy in a one-dimensional policy space. We show that in both models the grand coalition is the efficient coalition structure and agents are always better off in the grand coalition than in a contest among singletons. Individual agents (in the rent seeking contest) and extremists (in the policy conflict) only have an incentive to secede when they anticipate that their secession will not be followed by additional secessions. Incentives to secede are lower when agents cooperate inside groups. The grand coalition emerges as the unique subgame perfect equilibrium outcome of a sequential game of coalition formation in rent seeking contests.

In sharp contrast with the economic literature on conflict, this paper shows that confrontation may be efficiency enhancing. Conditions are derived under which a contest over the exclusive control of a resource Pareto dominates open access. When the population size is big enough or production exhibits strong decreasing returns to scale, agents unanimously prefer to engage in conflict. commons, exclusion contest, open-access resource

This paper presents an axiomatic characterization of difference-form group contests, that is, contests fought among groups and where their probability of victory depends on the difference of their effective efforts. This axiomatization rests on the property of Absolute Consistency, stating that the difference in winning probabilities between two contenders in the grand contest must be the same as when they engage in smaller contests. This property overcomes some of the drawbacks of the widely-used ratio-form contest success functions. Our characterization shows that the criticisms commonly-held against difference-form contests success functions, such as lack of scale invariance, are unfounded. Finally, we extend our axiomatization to relative-difference contests where winning probabilities depend on the difference of contenders effective efforts relative to total aggregate effort.

Contests are situations in which a set of agents compete for a valuable object, rent or award. The present paper analyzes difference-form group contests, that is, contests fought among groups and where their probability of victory depends on the difference of their effective efforts. First, we show that the non-existence of pure-strategy equilibria and the monopolization results obtained in previous analysis of difference-form contests rest critically on the assumption of a linear cost of effort. Under exponential costs, we show that pure strategy equilibria exist in a large set of cases and that more than one group can expend positive effort in equilibrium. Second, we show that inequality of valuations of victory within groups hinders their chances of prevailing in the contest. If possible; members may find beneficial to engage in progressive redistribution within their group.

Recent research has explored the relationship between facial masculinity, human male behaviour and males' perceived features (i.e. attractiveness). The methods of measurement of facial masculinity employed in the literature are quite diverse. In the present paper, we use several methods of measuring facial masculinity to study the effect of this feature on risk attitudes and trustworthiness. We employ two strategic interactions to measure these two traits, a first-price auction and a trust game. We find that facial width-to-height ratio is the best predictor of trustworthiness, and that measures of masculinity which use Geometric Morphometrics are the best suited to link masculinity and bidding behaviour. However, we observe that the link between masculinity and bidding in the first-price auction might be driven by competitiveness and not by risk aversion only. Finally, we test the relationship between facial measures of masculinity and perceived masculinity. As a conclusion, we suggest that researchers in the field should measure masculinity using one of these methods in order to obtain comparable results. We also encourage researchers to revise the existing literature on this topic following these measurement methods.

Recent literature has emphasized that individuals display different depths of reasoning when playing games. In this paper, we explore gender differences in strategic sophistication and study whether these differences are endogenous. We report results from two different experiments employing the beauty contest. In the first, large study, we show that females react very strongly to incentives to the extent that gender differences disappear when a monetary prize is awarded. In the second study, we use a within subject design to analyze how depth of reasoning varies with gender priming and the gender composition of the set of players. We corroborate that females display higher levels of sophistication and even overtake males when incentives are provided and gender is primed. On the other hand, males who believe that females are better in the game display higher sophistication when playing against females.

While survey data supports a strong relationship between personality and labor market outcomes, the exact mechanisms behind this association remain unexplored. In this paper, we take advantage of a controlled laboratory set-up to test whether this relationship operates through productivity, and isolate this mechanism from other channels such as bargaining ability or self-selection into jobs. Using a gender neutral real-effort task, we analyse the impact of the Big Five personality traits on performance. We find that more neurotic subjects perform worse, and that more conscientious individuals perform better. These findings are in line with previous survey studies and suggest that at least part of the effect of personality on labor market outcomes operates through productivity. In addition, we find evidence that gender and university major affect the impact of the Big Five personality traits on performance.

This paper analyses the problem that an incumbent faces during the legislature when deciding how to react to citizen p roposals such as the outcome of referenda or popular initiatives. We argue that the se proposals constitute a potential source of electoral disadvantage when cit izens factor in their evaluation of the incumbent his reaction to these proposals. T his is because an incumbent politician may jeopardize his re-election by implem enting policies close to his preferred ones but unpopular among the electorate. We characterize conditions under which this potential disadvantage becomes in fact an electoral advantage for the incumbent. We fi nd that the choices of the incumbent during the legislature will be closest to citizens policy proposals when the intensity of electoral competition is neither t oo soft nor too tough. Finally, we use our results to discuss some implications of the use of mechanisms such as referenda and popular assemblies on electoral competition and on the incumbency advantage phenomenon.

A group of agents must defend their individual income from an external threat by pooling their efforts against it. The winner of this confrontation is determined by a contest success function where members’ efforts may display different degrees of complementarity. Individual effort is costly and follows a convex isoelastic function. We investigate how the success of the group in the conflict and its members’ utilities vary with the degree of within-group inequality. We show that there is a natural relationship between the group’s probability of victory and the Atkinson index of inequality. If members’ efforts are complementary or the cost function convex enough, more egalitarianism within the group increases the likelihood of victory against the external threat. The opposite holds when members’ efforts are substitutes and the cost linear enough. Finally, we obtain conditions under which richer members of the group are willing to make transfers to poorer membres in order to enhance their final payoff.

This paper studies bargaining and conflict under incomplete information, provides an overview and a critical account of the literature on the topic and contributes with original research. We first revise models of mechanism design and sequential bargaining that take confrontation as final. Conflict and inefficiencies are to be expected in these models whenever parties have optimistic prospects on the outcome of the all-out conflict. After examining the causes and reasons for this optimism, we move to the analysis of the recent literature that considers the existence of limited confrontations that allow bargaining to resume. In the presence of private information, these limited conflicts convey information and thus become a bargaining instrument. The paper closes with a discussion on the related empirical literature, the challenges that it faces and some potential avenues for further research.

This paper analyses how institutions aimed at coordinating economic interactions may emerge. Starting from a hypothetical state of nature, agents can delegate the task of enforcing cooperation to one of them in exchange for a proper compensation. Both individual and collective commitment problems stand in the way of institution formation. These problems imply first that a potentially efficient institution may fail to emerge and also that if it emerges, it may do so inefficiently. We show that big and untrustworthy societies are more likely to support institutions whereas their emergence is more difficult in small and trusting societies, but if institutions do emerge, they tend to be more inefficient in the former type of societies. Finally, we show that the threat of secession by a subset of agents may alleviate the latter problem.

We analyze risk taking behavior of banks in the context of spatial competition. Banks mobilize unsecured deposits by offering deposit rates, which they invest either in a prudent or a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market power that the banks enjoyed in the deposit market is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market power, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behavior. Also, introduction of a deposit insurance scheme exacerbates banks’ moral hazard problem if the insurance premium is sufficiently low. Finally, we introduce a loan market where the borrowers of the banks choose the investment strategy prior to the deposit contracts. We show that as the market power that the banks enjoy in the loan market increases the borrowers tend to take more risk.

We analyse risk-taking behaviour of banks in the context of spatial competition. Banks mobilise unsecured deposits by offering deposit rates, which they invest either in a prudent or in a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behaviour. Finally, introduction of a deposit insurance scheme exacerbates banks’ moral hazard problem.

Participatory democracy is a process of collective decision making that combines elements from both direct and representative democracy: Citizens have the power to decide on policy proposals and politicians assume the role of policy implementation. The aim of this paper is to understand how participatory democracy operates, and to study its implications over the behavior of citizens and politicians and over the final policy outcomes. To this end, we explore a formal model inspired by the experience of Participatory Budgeting implemented in the Brazilian city of Porto Alegre, that builds on the model of meetings with costly participation by Osborne et al. [2000. Meetings with costly participation. American Economic Review 90, 927-943]. © 2008 Elsevier B.V. All rights reserved., Aragone` s acknowledges financial support from the Spanish Ministry of Science and Technology, Grant number SEC2003-01961and Barcelona GSE research network. Sánchez-Pagés acknowledges financial support from the Spanish Ministry of Science and Technology, Grant number PB98-0465. This paper is part of the PACProjectCIT-2-CT-2004-506084 funded by the European Comission.

We analyse risk-taking behaviour of banks in the context of a model based on spatial competition. Banks mobilise deposits by offering deposit rates. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in, and some depositors may even be left out of the market. Our results suggest a discontinuous relation between market concentration and social welfare. We also show that, in a regime of high deposit insurance, banks are more likely to gamble.

Participatory Democracy is a process of collective decision making that combines elements from both Direct and Representative Democracy: Citizens have the power to decide on policy and politicians assume the role of policy implementation. The aim of this paper is to understand how Participatory Democracy operates, and to study its implications over the behavior of citizens and politicians and over the final policy outcomes. To this end, we explore a formal model inspired by the experience of Participatory Budgeting implemented in the Brazilian city of Porto Alegre, that builds on the model of meetings with costly participation by Osborne, Rosenthal, and Turner (2000).

Open Access: This article is distributed under the terms of the Creative Commons Attribution License., We propose an elementary theory of wars fought by fully rational contenders that features three of the main rationalist explanations for armed conflicts: uncertainty, commitment, and indivisibility. Two parties play a Markov game that combines stages of bargaining, where offers are made, with claim stages, where one side can commit to impose surrender on the other. Under uncertainty on the persistence of claims, long confrontations occur in the unique equilibrium of the game: war arises when reality disappoints initial (rational) optimism, and it persists when both agents are optimists but reality proves both wrong. Bargaining proposals that are rejected initially might eventually be accepted after several periods of confrontation. We provide an explicit computation of the equilibrium, evaluating the probability of war, and its expected losses as a function of (i) the costs of confrontation, (ii) the asymmetry of the split imposed under surrender, and (iii) the strengths of contenders at attack and defense. Changes in these parameters display non-monotonic effects. © 2011 The Author(s).

This paper analyzes the role of external conflict as a force that can create social capital. Hostile inter-group interactions can help to resolve intra-group social dilemmas but these potential gains must be weighed against the insecurity of hostile relations with an out-group. Our central result is that the presence of an outside threat can induce higher levels of social capital either because a protective aspect of social capital comes into play and/or as a reallocation of investments from private to social capital. Given that social capital is potentially subject to free-riding, the threat, by promoting a greater level of social capital, can be welfare improving. When the threat is severe, social capital and welfare are more likely to fall. This effect of an external threat on social capital is stronger in poor economies. These results can shed light on the sometimes contradicting empirical evidence on the relationship between conflict and social capital.