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Borrowed Power: Debt Finance and the Resort to Arms

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  • Slantchev, Branislav

Abstract

Military expenditures are often funded by debt, and sovereign borrowers are more likely to renege on debt-service obligations if they lose a war than if they win one or if peace prevails. This makes expected debt service costlier in peace, which can affect both crisis bargaining and war termination. I analyze a complete-information model where players negotiate in the shadow of power, whose distribution depends on their mobilization levels, which can be funded partially by borrowing. I show that players can incur debts that are unsustainable in peace because the opponent is unwilling to grant the concessions necessary to service them without fighting. This explanation for war is not driven by commitment problems or informational asymmetries but by the debt-induced inefficiency of peace relative to war. War results from actions that eliminate the bargaining range rather than from inability to locate mutually acceptable deals in that range.

Suggested Citation

  • Slantchev, Branislav, 2009. "Borrowed Power: Debt Finance and the Resort to Arms," MPRA Paper 40505, University Library of Munich, Germany, revised 24 Jul 2012.
  • Handle: RePEc:pra:mprapa:40505
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    References listed on IDEAS

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    1. Fearon, James D., 1995. "Rationalist explanations for war," International Organization, Cambridge University Press, vol. 49(03), pages 379-414, June.
    2. Michael D. Bordo & Eugene N. White, 1990. "British and French Finance During the Napoleonic Wars," NBER Working Papers 3517, National Bureau of Economic Research, Inc.
    3. Slantchev, Branislav L. & Tarar, Ahmer S., 2010. "Mutual Optimism as a Rationalist Explanation for War," MPRA Paper 40558, University Library of Munich, Germany, revised Jan 2011.
    4. Garfinkel, M.R. & Skaperdas, S., 2000. "Conflict without Misperceptions or Incomplete Information: how the Future Matters," Papers 99-00-11, California Irvine - School of Social Sciences.
    5. Garfinkel, Michelle R. & Skaperdas, Stergios, 2007. "Economics of Conflict: An Overview," Handbook of Defense Economics, Elsevier.
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    Cited by:

    1. McDougal, Topher & Caruso, Raul, 2013. "Wartime Violence and Post-Conflict Development Policy: The Case of Agricultural Concessions in Mozambique," NEPS Working Papers 1/2013, Network of European Peace Scientists.
    2. Vesperoni , Alberto, 2013. "War Finance and the Modern State," NEPS Working Papers 6/2013, Network of European Peace Scientists.

    More about this item

    Keywords

    crisis bargaining; conflict inefficiency; endogenous distribution of power; military debt;

    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • N40 - Economic History - - Government, War, Law, International Relations, and Regulation - - - General, International, or Comparative

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