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Defense and Welfare under Rivalry

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  • Panagariya, Arvind
  • Shibata, Hirofumi

Abstract

Two small countries facing a constant probability of war with each other import arms for consumption goods from the rest of the world. The defense good, produced by combining arms and army, is a public good. The reaction curve depicting the optimal supply of the defense good turns out to be backward-bending. Nevertheless, at least one of the reaction curves is positively sloped at the unique Nash equilibrium. Several comparative statics results are derived. For example, if one country's reaction curve is negatively sloped, military aid to the rival leads to a decline in its optimal supply of the defense good. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Panagariya, Arvind & Shibata, Hirofumi, 2000. "Defense and Welfare under Rivalry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 951-969, November.
    • Handle: RePEc:ier:iecrev:v:41:y:2000:i:4:p:951-69
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    Cited by:

    1. Ronen Bar-El & Kobi Kagan & Asher Tishler, 2010. "Forward-Looking versus Shortsighted Defense Budget Allocation," Journal of Conflict Resolution, Peace Science Society (International), vol. 54(4), pages 638-662, August.
    2. Raul Caruso, 2012. "Differentials in property Rights in a two-sector economy," Revue d'économie politique, Dalloz, vol. 122(2), pages 257-278.
    3. Marcus Matthias Keupp, 2021. "Introduction: The Fundamental Economic Problem of the Military," Springer Books, in: Defense Economics, chapter 0, pages 1-21, Springer.

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