Corruption in Japanese Defense Procurement: A Game-theoretic Analysis

The Japanese defense market is an oligopoly. Firms in the defense industry also produce civilian goods, and the revenues they obtain from defense contracts are quite small relative to the revenues coming from the production of private goods. Because the Japanese constitution prohibits arms export, the defense industry in Japan essentially serves an internal market. Furthermore, defense contracts are not awarded on a competitive basis. The procurement procedures rely on cost-plus contracts, most of which are carried out at the discretion of the bureaucrats in charge. Information on prices and contracts thus become extremely opaque, which makes it easier for misuse and corruption to flourish. The paper presents a game that incorporates these features of the defense procurement process. The results of the analysis suggest that the government pay for low-quality defenses goods at inflated prices. Furthermore, because Japanese firms are shielded from competition and because of the lack of a large foreign market, the Japanese defense industry has no incentive to engage in R&D to improve the quality of its defense goods.