Perfect Equilibrium in a Model of Competitive Arms Accumulation

Abstract

This paper shows that the subgame-perfect Nash strategic equilibrium, which is relevant when countries can monitor their rival's weapon stock, leads to lower levels of arms and higher welfare than the standard open-loop Nash strategic equilibrium for an arms race. This result is derived for a model of competitive arms accumulation, in which two countries face a classic guns versus butter dilemma in the form of utilities which depend on consumption, leisure and the characteristic defence. Moreover, it is argued that the perfect equilibrium strategies lead to a more satisfactory strategic underpinning of the well-known Richardson equations.

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