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Trade Costs, Conflicts, and Defense Spending

  • Seitz, Michael
  • Tarasov, Alexander
  • Zakharenko, Roman

This paper develops a quantitative model of trade, military conflicts, and defense spending. Trade liberalization between two countries reduces probability of an armed conict between them, causing both to cut defense spending. This in turn causes a domino effect on defense spending by other countries. As a result, both countries and the rest of the world are better off. We estimate the model using data on trade, conflicts, and military spending. We find that, after reduction of costs of trade between a pair of hostile countries, the welfare effect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 15733.

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Date of creation: 01 Jul 2013
Date of revision:
Handle: RePEc:lmu:muenec:15733
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  19. Stergios Skaperdas & Constantinos Syropoulos, 2001. "Guns, Butter, and Openness: On the Relationship between Security and Trade," American Economic Review, American Economic Association, vol. 91(2), pages 353-357, May.
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