Working Paper: CEPR ID: DP206
Authors: Frederick van der Ploeg; Aart J. de Zeeuw
Abstract: We consider a model in which two countries are involved in arms accumulation. The West is a decentralized market economy whose government uses optimal taxation to provide a public good, defense. The East is a centrally planned economy. Utility depends on consumption, leisure and defense; defense is a characteristic which is an increasing function of the difference between home and foreign weapon stocks. The cooperative outcome leads to a moratorium on investment in weapons. Two non-cooperative solutions to this differential game are also considered. The first is an open-loop Nash equilibrium solution, which presumes that countries cannot condition their investment in arms on the rival's weapon stocks. The second is a perfect Nash equilibrium solution, which presumes that countries can monitor foreign weapon stocks. The perfect equilibrium solution leads to lower levels of arms and is therefore more efficient, so that a unilateral arms treaty should allow countries to observe their rival's weapon stocks. In other words, verification leads to lower weapon stocks and higher welfare for both countries. The perfect equilibrium solution also provides a more satisfactory strategic foundation for the Richardson equations.
Keywords: arms accumulation; dynamic game; subgame-perfect Nash equilibrium; monitoring
JEL Codes: 114
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cooperative outcome (C71) | moratorium on weapons investment (H56) |
| cooperative behavior (C71) | arms accumulation (H56) |
| open-loop Nash equilibrium (C72) | higher arms accumulation (H56) |
| perfect Nash equilibrium (C72) | less arms accumulation (H56) |
| perfect Nash equilibrium (C72) | higher welfare (I31) |
| monitoring foreign weapon stocks (H56) | lower weapon stocks (H56) |
| monitoring foreign weapon stocks (H56) | higher welfare (I31) |
| monitoring (E63) | unilateral disarmament (F52) |