Economics of Conflict,
War, and Peace
Prof. Dr. Jurgen Brauer; Summer 2009
Chulalongkorn University; Bangkok, Thailand
Session 1.4
Modeling conflict
Modeling conflict

Two models today


Boulding’s LSG model
Arms trade taxation model (Brzoska/Brauer)






Small arms supply and demand
Supply and demand
Shifts in supply and demand
Elasticities of supply and demand
Intervention/s in the market; black market
[more models throughout the course]
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
2
Boulding’s model (1)
Loss of Strength Gradient (LSG),
i.e., a slope parameter
K
H
F
M
C
G
g
l
L
A is dominant
B is dominant
D
A
B
D is the boundary of equal strength with height C
Source: Boulding (1970 [1968]), p. 118
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
3
Boulding’s model (2)

Now let’s “play” …
 Let AH = a (A’s home strength)
 Let BK = b (B’s home strength)
 Let AB = s (distance between A and B)
 and let ΔAH/ΔAB = c (the slope of A’s strength gradient toward B)
 Then a – b = cs becomes an equilibrium condition where B is
“just conditionally viable” with respect to A
 So if a > b, A’s greater home strength must be “neutralized” either
by a steeper slope (|c|) of A’s strength function toward B (that is,
less effective power projection by A toward B), or by a greater
distance (s) between A and B (or a combination of both).
 For A, distance s is not a strategic variable, but a and |c| are (and
vice versa for B), that is, increase home strength and/or decrease
the slope of the strength gradient (smaller |c|) to result in a
greater reach of A’s strength toward B. “Effective distance”
diminishes and increases the risk of war.
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
4
Boulding’s model (3)
A is dominant over the entire range
H
B is conditionally viable
… the condition being A’s disposition toward B
(a) secure conditional viability
(b) insecure conditional viability
F
G
K
M
L
B
A
Source: Boulding (1970 [1968]), p. 118
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
5
Boulding’s model (4)
“Loss” [gain] of Strength Gradient (LSG),
i.e., the slope parameter is positive!
C
L
F
H
K
G
M
B is dominant
over A
A is dominant
over B
A
D
B
Source: Boulding (1970 [1968]), p. 119
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
6
Brzoska/Brauer model (1)
P/unit
Brzoska, 2004, p. 151
1. Reduce volume of arms trade
2. Reduce spending on arms imports
S
3. Create revenue for a fund …
S 4. … to compensate war victims or
general economic development
Tax revenue
But …
1. This argument relies on the
demand side
2. What will suppliers do? (For one
thing, they will only receive P*)
P*
P*
P*
D
Q (arms)
Q* Q*
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
7
Brzoska/Brauer model (2)

Possible supply-side reactions …




Why should suppliers voluntarily reduce arms
exports? What benefits do they gain that outweigh
their costs of export losses?
Strategic behavior; why be the first to reduce
exports?
No enforcer in case of non-compliance; lower P*
causes tax evasion problem
Higher P* encourages new entries into the market
(domestic production of former arms importers)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
8
Brzoska/Brauer model (3)
S’

S’
If S is inelastic (steep
slope) ...

P/unit
S

S



D
Market P* will not rise as
much
But P* will fall more,
hurting weak producers,
encouraging evasion
Q will fall not as much
R will rise, benefiting
producer governments
… but R may be fungible
by reducing “normal”
foreign aid budgets
Q (arms)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
9
Brzoska/Brauer model (4)

If D is inelastic (steep
slope) …

P/unit
S
S




D’
D
Market P* will rise more,
encouraging customer
substitution (selfproduction or illegal trade)
P* will not fall as much
Q will fall not as much
R will rise, benefiting
producer governments
… but R may be fungible
by reducing “normal”
foreign aid budgets
Q (arms)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
10
Brzoska/Brauer model (5)

Brzoska’s estimates
 Base case: Arms trade (weapons/supplies) value $50 billion
 Tax: 10% | E(d) = - 0.5 | E(s) = +1.0 (i.e., flat S slope)
 P* up by 6.5% | Q* down by 3.2% | TR = $51.5bn
 R (sellers) = $46.4bn | R (gov) = $5.1bn






Tax: 10% | E(d) = - 0.5 | E(s) = +10.0 (i.e., flatter S slope)
P* up by 9.5% | Q* down by 0.5% (?) | TR = $54.5bn
R (sellers) = $49.0bn = E (buyers) | R (gov) = $5.5bn
Tax: 10% | E(d) = - 0.1 (i.e., steeper D slope) | E(s) = +10.0
P* up by ~10.0% | Q* down by ~0.0% | TR = ~$55.0bn
R (sellers) = ~$50.0bn = E (buyers) | R (gov) = ~$5.0bn
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
11
Brzoska/Brauer model (6)

Likely tax incidence

If S is flat (perfectly price elastic) [competitive suppliers]


If D is steep (perfectly price inelastic) [inelastic demand]


Then a tax can be fully rolled over to buyers
Then a tax can be fully rolled over to buyers
Thus it seems likely that an arms trade tax results in
higher buyer prices

So R collected in producer countries to help fund war
victims compensation is transferred to victim countries,
which are also buyers of arms => aid fungibility issue
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 1.4
12