Abstract
This paper presents a model of subsidized military production that examines the relationship between domestic procurement and arms exports. Weapon producers satisfy the defence procurement in their own country and compete in prices in the international market where weapons are imperfect substitutes for each other. Importers are involved in an arms race situation and do not have domestic military production. The model makes explicit the strategic interaction between governments and firms in the export market. We then analyze the effect of a change in the most significant parameters on the equilibrium. The paper suggests an explanation for the evolution of the arms market in the past few years and highlights the important role of the demand and cost structures.
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