The Economics of Defense.

• Author: Anderton, Charles H.

This book surveys many of the major contributions, methods and ideas of the defense and peace economics literature. The book draws upon Sandler and Hartley's comparative research strengths in the field. An excellent balance is struck between data, mathematical models, and discussion. Topics include alliances, arms races, arms control, weapons trade, procurement, defense industry, economic impacts of defense spending, terrorism and guerrilla warfare. The book could be used in graduate or upper-level undergraduate courses on the economics of peace and war. Economists entering the field will find the book to be an excellent source for what has been accomplished and for research areas that need the most attention. For specialists already in the field, the book serves as an up-to-date unified source of the academic literature on defense and peace economics.

After an opening chapter that defines the scope of the field, an excellent review of the economic theory of alliances is presented. The literature was motivated by Olson and Zeckhauser's [3] pure public good model of alliance burden-sharing. The model generates a number of testable predictions including the classic burden-sharing hypothesis: large, wealthy allies shoulder the burden for small, poorer allies. The prediction was borne out using 1964 data on the North Atlantic Treaty Organization (NATO). By the 1970s, the burden-sharing hypothesis no longer seemed to apply to NATO. To explain the empirical shortcoming, researchers developed more general alliance models that allowed military expenditures to provide multiple benefits that vary in their degree of publicness among allies. The new models provided fresh hypotheses about alliance behavior. The authors present the theoretical and empirical development of the economics of alliances in a rigorous, accessible, and thorough manner. Their summary table of twenty-three empirical studies on alliances is notable for its clarity and usefulness.

A chapter on arms races covers all of the core models: Prisoner's Dilemma, Richardson's equations, McGuire's static optimization model, the Intriligator-Brito model, Wolfson's economic warfare, Brito's dynamic optimization model, and Simaan and Cruz's differential game approach. Major extensions to the core models are presented as well as selected empirical studies of arms rivalries.

The procurement chapter highlights the principal-agent problem and builds upon Scherer's [4] classic text. Approaches to...