THE HOME MARKET EFFECT IN INTERNATIONAL ARMS TRADE

Oana Tocoian

Economic Inquiry, 2015, vol. 53, issue 4, 1751-1764

Abstract: type="main" xml:id="ecin12220-abs-0001"> I show that military spending contributes to international arms proliferation through a push effect: large demand encourages production growth in the domestic market if transport costs are non-negligible. Under increasing returns to scale, the country can then supply weapons on the global market at low prices. This is a manifestation of the home market effect (HME), which states that countries with higher demand for a differentiated good will be net exporters of that good. I construct a monopolistic competition model of international trade that accounts for differences in demand across countries, and test its predictions using post-Cold War data . ( JEL F1, H5, R1)

Date: 2015
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