Cycles of Distrust: An Economic Model∗

We propose a model of cycles of distrust and conflict. Overlapping generations of agents from two groups sequentially play coordination games under incomplete information about whether the other side consists of “extremists” who will never take the good/trusting action. Good actions may be mistakenly perceived as bad/distrusting actions. We also assume that there is limited information about the history of past actions, so that an agent is unable to ascertain exactly when and how a sequence of bad actions originated. Assuming that both sides are not extremists, snowballs of distrust and conflict get started as a result of a mistaken perception, and continue because the other side interprets the bad action as evidence that it is facing extremists. However, such snowballs of distrust and conflict contain the seeds of their own dissolution: after a while, Bayesian agents correctly conclude that the probability of a snowball having started by mistake is suffi ciently high, and bad actions are no longer interpreted as evidence of extremism. At this point, one party experiments with a good action, and the cycle restarts. We show how this mechanism can be useful in interpreting cycles of ethnic conflict and international war, and how it also emerges in models of dynamic inter-group trade, communication and political participation– leading to cycles of breakdown of trade, breakdown of communication, and political polarization.