International Conflict and Military Expenditures : An Externality Approach

This article analyzes the two-stage problem a country faces in first choosing the optimal amount of arms to acquire and then deciding whether it can improve upon the allocation that emerges after the first stage by engaging in a military conflict. A model is introduced based on the concept of economic externality to generate conflict situations in the first stage. Then comparative static results are derived by varying the parameters of this model, for example, the rate of technological progress in the military sector and the rate of economic growth, and examining whether the conflict situation improves or worsens as the social welfare of the nations change accordingly. Uncertainty is then introduced and the results are analyzed. Finally, the last part explores the conditions under which the conflict situations presented in the first stage actually lead to the outbreak of war