Arms race and economic growth

Abstract

This paper investigates the dynamic implications of an arms race between two rival countries. By incorporating defence spending into the conventional overlapping generations growth model, this paper explores long‐run consequences for national security and economic growth. The security spending–GDP ratio increases with economic growth if defence technology has a fixed benefit. Although the steady‐state defence spending is too much in terms of the static efficiency (or compared with private consumption), it may be too little if private saving is too little in terms of the dynamic efficiency. We also explore the unstable nature of an arms race when defence technology needs a fixed cost in the cases of “open war” and “closed war”, or it is efficient and the initial capital stock is low in the case of “open war”. In such cases, both countries could not grow in the long‐run due to the arms race effect.