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A Theory of War Finance

  • Herschel I. Grossman
  • Taejoon Han

This paper analyzes the financial and war-spending policies of a state that faces a war in which defeat would result in the loss of sovereign power and in which the material consequences, conditional on avoiding defeat, are stochastic. The analysis takes explicit account of the historical experiences of lenders, who face debt repudiation if the state to whom they have lent is defeated and who also face partial default if the material consequences of the war are unfavorable for the debtor state, even if it avoids defeat. In this analysis, the state uses war debt to smooth expected consumption intertemporally in response to temporary war spending, and the state also uses contingent debt servicing to insure realized consumption against the risk associated with the material consequences of the war.

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File URL: http://www.nber.org/papers/w3799.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3799.

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Date of creation: Aug 1991
Date of revision:
Publication status: published as Defence Economics, Vol. 4, pp. 33-44, (1993).
Handle: RePEc:nbr:nberwo:3799
Note: ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
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  1. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  2. Peter M. Garber, 1991. "Alexander Hamilton's Market Based Debt Reduction Plan," NBER Working Papers 3597, National Bureau of Economic Research, Inc.
  3. Herschel I. Grossman, 1988. "The Political Economy of War Debts and Inflation," NBER Working Papers 2743, National Bureau of Economic Research, Inc.
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