Abstract This paper develops a model of colonial wars and trade restrictions, in which two metropolises compete for control over a colony's trade policy. In equilibrium, the metropolis that gains control can improve its terms of trade by restricting its rival's access to colonial trade. However, implementing these restrictions often affects trade between the two metropolises themselves. Three equilibrium outcomes can arise: (i) peace with free trade, when both metropolises value trade with each other above colonial trade; (ii) war with exclusive colonial trade, when both prefer colonial trade to mutual trade; or (iii) war with either free or exclusive colonial trade, depending on whether the victor prioritizes trade with its rival over colonial trade. The model captures central features of the mercantilist era—rapid expansion of overseas commerce, colonial conflicts, and restrictive trade policies—and provides insights into the eventual decline of mercantilism.
Cruz et al. (Tue,) studied this question.