Trade Costs, Conflicts, and Defense Spending

42 Pages Posted: 15 Jan 2015  

Michael Seitz

Ludwig Maximilian University of Munich - Faculty of Economics

Alexander Tarasov

Ludwig Maximilian University of Munich

Roman Zakharenko

National Research University Higher School of Economics

Date Written: January 29, 2014

Abstract

This paper develops a quantitative model of trade, military conflicts, and defense spending. Lowering trade costs between two countries reduces probability of an armed conflict between them, causing both to cut defense spending. This in turn causes a domino effect on defense spending by other countries. As a result, both countries and the rest of the world are better off. We estimate the model using data on trade, conflicts, and military spending. We find that, after reduction of costs of trade between a pair of hostile countries, the welfare effect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.

Keywords: general equilibrium, gains from trade, defense spending

JEL Classification: C5, C6, F13, F51, H56

Suggested Citation

Seitz, Michael and Tarasov, Alexander and Zakharenko, Roman, Trade Costs, Conflicts, and Defense Spending (January 29, 2014). Available at SSRN: https://ssrn.com/abstract=2495986 or http://dx.doi.org/10.2139/ssrn.2495986

Michael Seitz

Ludwig Maximilian University of Munich - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Alexander Tarasov

Ludwig Maximilian University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

HOME PAGE: http://www.iwb.vwl.uni-muenchen.de/personen/assistenten/tarasov/index.html

Roman Zakharenko (Contact Author)

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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