How Elastic is the Government's Demand for Weapons?

36 Pages Posted: 2 Oct 2007

See all articles by Frank R. Lichtenberg

Frank R. Lichtenberg

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: July 1989

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.

Suggested Citation

Lichtenberg, Frank R., How Elastic is the Government's Demand for Weapons? (July 1989). NBER Working Paper No. w3025, Available at SSRN: https://ssrn.com/abstract=463467

Frank R. Lichtenberg (Contact Author)

Columbia Business School - Finance and Economics ( email )

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