Forward-Looking versus Shortsighted Defense Budget Allocation

Abstract

This study presents an analytical model of budget allocation into military and civilian expenditures within an arms race between two rival countries and compares the consequences of shortsighted (period-by-period) planning versus forward-looking (long-term) planning. The authors show that although shortsighted planning is favorable for both countries, they are likely to be locked in a prisoner’s dilemma in which both overinvest in arms procurement. The likelihood of overinvestment in arms procurement is higher when the perceived benefit from security is higher and when future benefits from existing arms stocks are ‘‘high’’; that is, when the rate of technology improvement over time is lower, the depreciation rate of existing arms is lower and the discount factor is higher. A dynamic version of Kagan et al., employing real-world data, finds evidence for the existence of a prisoner’s dilemma in the Israeli—Syrian arms race.