1. Economics of Conflict, War, and Peace
Prof. Dr. Jurgen Brauer; Summer 2009
Chulalongkorn University; Bangkok, Thailand
Session 1.4
Modeling conflict

2. Economics of Conflict, War, and Peace Session 1.4
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

3. Economics of Conflict, War, and Peace Session 1.4
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
Boulding’s “mutual unconditional viability” model A D 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

4. Economics of Conflict, War, and Peace Session 1.4
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

5. Economics of Conflict, War, and Peace Session 1.4
Boulding’s model (3)
A is dominant over the entire range
B is conditionally viable
… the condition being A’s disposition toward B H
(a) secure conditional viability
(b) insecure conditional viability F G K M
Boulding’s “conditional viability” model L A B
Source: Boulding (1970 [1968]), p. 118
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 1.4

6. Economics of Conflict, War, and Peace Session 1.4
Boulding’s model (4)
“Loss” [gain] of Strength Gradient (LSG),
i.e., the slope parameter is positive! G L C F H K M
B is dominant
over A
A is dominant
over B
Boulding’s “mutual conditional viability” model; originally published 1962; applies to nuclear weapons and ballistic missile developments; still applicable today; doctrine of mutually assured destruction (MAD) 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

7. Brzoska/Brauer model (1)
Brzoska, 2004, p. 151
Reduce volume of arms trade
Reduce spending on arms imports
Create revenue for a fund …
… to compensate war victims or
general economic development
P/unit
Tax revenue S S
But …
This argument relies on the
demand side
What will suppliers do? (For one
thing, they will only receive P*) P* P* P*
Here, for example, why, when, and how often are mixed in a single figure. D
Q (arms) Q* Q*
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 1.4

8. 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

9. Brzoska/Brauer model (3)
If S is inelastic (steep slope) ...
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 S’ S’
P/unit S S D
Q (arms)
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 1.4

10. Brzoska/Brauer model (4)
If D is inelastic (steep slope) …
Market P* will rise more, encouraging customer substitution (self-production 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
P/unit S S D’ D
Q (arms)
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 1.4

11. Brzoska/Brauer model (5)
Brzoska’s estimates
Base case: Arms trade (weapons/supplies) value $50 billion
Tax: 10% | E(d) = | 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) = | E(s) = (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) = (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

12. Brzoska/Brauer model (6)
Likely tax incidence
If S is flat (perfectly price elastic) [competitive suppliers]
Then a tax can be fully rolled over to buyers
If D is steep (perfectly price inelastic) [inelastic demand]
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