Working Paper: NBER ID: w3025
Authors: Frank R. Lichtenberg
Abstract: We attempt to make inferences about the elasticity of the government's demand for specific weapons by analyzing the statistical relationship between quantity and cost revisions across the population of major weapon systems, using data contained in the Pentagon's Selected Acquisition Reports. The cost revisions are due in part to the arrival of technological information generated in the course of research and development. When we standardize the data by program base year, we find that the elasticity of demand is .55, and is significantly different from both zero and unity. Thus, the governments demand for specific weapons is inelastic, but not perfectly inelastic. The estimates also imply that weapons acquisition is characterized by increasing returns: the mean and median values of the elasticity of total cost with respect to quantity are .78 and .72, respectively.
Keywords: Defense Procurement; Demand Elasticity; Weapons Systems
JEL Codes: H56; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| revisions in cost estimates due to technological advancements (O22) | changes in the quantity of weapons the government is willing to purchase (H56) |
| as costs are revised downwards (D24) | quantity demanded increases (J23) |
| elasticity of demand for specific weapons (H56) | influenced by the degree of substitutability between weapon systems (H56) |
| total cost (D24) | quantity (C69) |