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Article

Trade Costs, Conflicts, and Defense Spending

Journal of International Economics. 2015. Vol. 95. No. 2. P. 305-318.
Zakharenko R., Seitz M., Тарасов А.

This paper develops a quantitative model of trade, military con icts, and defense spending. Trade liberalization between two countries reduces probability of an armed con ict between them, causing both to cut defense spending. This in turn causes a domino e ect on defense spending by other countries. As a result, both countries and the rest of the world are better o . We estimate the model using data on trade, con icts, and military spending. We nd that, after reduction of costs of trade between a pair of hostile countries, the welfare e ect of worldwide defense spending cuts is comparable in magnitude to the direct welfare gains from trade.