DP770 | The Economics of the International Arms Trade

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Sales of arms are a significant component of international trade and raise a range of pressing policy issues. After a short review of the market, this paper provides a formal model of the trade which allows for competing, forward-looking suppliers whose welfare depends on both the economic benefits from the sales and the security repercussions of recipient behaviour. The recipient's behaviour depends on their military capability which is a function of the stock of arms they have acquired. We first examine myopic recipients, whose behaviour depends on current stocks, then forward-looking recipients for whom questions of the time-consistency and the credibility of supplier threats to embargo, or promises to resupply become crucial. Finally, we examine the impact of supplier cooperation of the sort currently being discussed in the UN Security Council.