Optimal Defense Spending

Abstract

Despite its importance as a resource allocation problem, surprisingly little is known about the optimal level of defense spending. Much of the existing literature uses game theoretic models of international conflict. Early applications of the theory, such as Brito (1972) and Intriligator (1975), focus on the arms race and the possibility of such a race leading to a war. Recent studies by Garfinkel (1990) and van der Ploeg and de Zeeuw (1990) investigate the problem of allocating resources among military spending, consumption and either peaceful investment (Garfinkel) or leisure (van der Ploeg and de Zeeuw) when two countries are engaged in competitive arms accumulation. They show that a solution depends on whether governments are acting opportunistically or cooperatively (Garfinkel) or whether each country can monitor the current levels of each other’s weapon stocks rather than the initial levels (van der Ploeg and de Zeeuw).

Paper Written to Honor Professor Ryuzo Sato.