The Capability Factors as Explanatory Variables of Equipment Unit Cost Growth: A Methodological Proposal

Juha-Matti Lehtonen and Jukka Anteroinen

Defence and Peace Economics, 2016, vol. 27, issue 2, 280-298

Abstract: In clarifying the conceptual and terminological issues of the unit cost growth of military equipment, six recent empirical studies on unit cost growth are reviewed and evaluated in this article. Even though the reported unit cost growth rates differ between equipment type and the individual studies, all of the studies find the unit cost growth rates of each military equipment type exceeding inflation. Various explanations proposed by different authors are reviewed. Unit cost growth studies omit corrections for quality changes of equipment, unlike the standard practice in inflation calculation. By bringing the military capability perspective into the discussion of unit cost growth, this article proposes a new approach to equipment unit cost growth, thereby enabling the collective evaluation of quality change with price change. This approach is demonstrated through a case study involving an armoured personnel carrier (APC). Although the price of the APC had increased sixfold with only a minor improvement in transportation capability, the proposed approach shows that the purchasing decisions of its successive generations may have still been cost-effective. The APC case demonstrated that the proposed approach can be successfully applied and yield meaningful results.

Date: 2016
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DOI: 10.1080/10242694.2015.1033886

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