The Economic Theory of Alliances

Abstract

This article surveys the development of the economic theory of alliances over the last quarter of a century since the 1966 article by Olson and Zeckhauser. The pure public good model and the joint product model are presented and then brought up to date. Alternative demand functions for military expenditures are indicated. Issues that concern alliance size, burden sharing, and suboptimality are addressed for the alternative paradigms. Theoretical extensions are reviewed and have involved the technology of public supply, the security function, alternative cost structures, group allocation processes, and institutional arrangements. Finally, theoretical developments are briefly related to the large empirical literature.