Simultaneous inter- and intragroup con‡ict

This paper models the trade-o ¤ between production and appropri-ation in the presence of simultaneous inter- and intra-group conicts. The model exhibits a group cohesion e¤ect : if the contest between the groups becomes more decisive, or contractual incompleteness be-tween groups becomes more serious, the players devote fewer resources to the intra-group conict. Moreover, there is also a reversed group cohesion e¤ect: if the intra-group contests become less decisive, or contractual incompleteness within groups becomes less serious, the players devote more resources to the inter-group contest. The model also sheds new light on normative questions. I derive exact conditions for when dividing individuals in more groups leads to more produc-tive and less appropriative activities. Further, I show that there is an optimal size of the organization which is determined by a trade-o¤ between increasing returns to scale in production and increasing costs of appropriative activities. Key-words: Conict, rent-seeking, federalism, hierarch