Expectations and Arms Races

Abstract

Recent empirical studies of arms races have produced two puzzling results. First, for several important arms races, particularly the U.S. -USSR case, there appears to be no interaction. Arms acquisition appears to be driven only by internal factors. Second, in several cases, nations appear to be responding to the current military expenditures of their opponent. This statistical result presents interpretation problems since nations do not know the current defense expenditure of their opponent at the time that they make their own military expenditure decision. A number of interpretations for these results have been provided. They include inappropriate model specification, inappropriate operationalization of military threat, and error-ridden military expenditure data. Nevertheless, the results persist and conflict with our more substantive and intuitive understanding of arms processes. A process based upon expectations of current arms expenditures of the opponent is developed to deal with this puzzle. In this paper several alternative expectation mechanisms are formulated and tested for a number of contemporary arms races.