Testing Two Explanations of the Liberal Peace: The Opportunity Cost and Signaling Arguments

Considerable evidence suggests that economic interdependence and integration reduce the likelihood of militarized conflict. However, scholars have devoted remarkably scant attention to testing different explanations of the liberal peace. This article offers an empirical test that can help adjudicate the two main arguments on the liberal peace: the opportunity cost and signaling arguments. Under the incomplete information assumption, I derive different observable implications of the competing arguments regarding how target states respond when challenged. By estimating selection models comprising dispute initiation and reciprocation, I find that, as challengers are more dependent on bilateral trade, targets are less likely to reciprocate disputes, which is supportive of the signaling argument. Regarding dispute initiation, increases in foreign direct investment and financial openness are associated with a decrease in the probability of conflict initiation. Last, the pacifying effects of the liberal economic variables are much more pronounced in contiguous and major dyads than in other dyads.