A Theory of War Finance

Herschel Grossman and Taejoon Han

No 3799, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the financial and war-spending policies of a state that faces a war in which defeat would result in the loss of sovereign power and in which the material consequences, conditional on avoiding defeat, are stochastic. The analysis takes explicit account of the historical experiences of lenders, who face debt repudiation if the state to whom they have lent is defeated and who also face partial default if the material consequences of the war are unfavorable for the debtor state, even if it avoids defeat. In this analysis, the state uses war debt to smooth expected consumption intertemporally in response to temporary war spending, and the state also uses contingent debt servicing to insure realized consumption against the risk associated with the material consequences of the war.

Date: 1991-08
Note: ME
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Citations: View citations in EconPapers (3)

Published as Defence Economics, Vol. 4, pp. 33-44, (1993).

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