The Option Value of Membership in a Defense Alliance

Vesa Kanniainen, Staffan Ringbom

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Membership in a defense alliance is viewed as an insurance option for a country subject to military threat. The focus is on the trade-off between domestically and internationally provided security as tax-financed public goods under heterogeneous risk classes of the members. A sufficient condition for a low-risk potential member to abstain from participation and a necessary condition for the participation of a high-risk potential member are stated. Disincentives for membership can include the cost of commitment in terms of the required production of the collective good, preemptive maneuvers, and ex post punishments of the enemy. The optimal tax is shown to be declining in the safety classification of a member subject to an adverse incentive effect of free riding. Solutions for the alliance size and the cost of membership are derived in the alliance equilibrium resorting to the fixed-point solution. With costly termination of membership, multiple equilibria can arise.
Original languageEnglish
Peer-reviewed scientific journalFinanzArchiv
Volume73
Issue number4
Pages (from-to)382-401
Number of pages20
ISSN0015-2218
DOIs
Publication statusPublished - 2017
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • Defence alliance
  • National security
  • safety classification

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