A DYNAMIC-MODEL OF CAPITAL AND ARMS ACCUMULATION

How does competitive arms accumulation affect investment and capital accumulation? In a dynamic optimization framework including both investment and military spending, we find that, when the utility function is separable between consumption and the weapon stocks, an unanticipated rise in current military threat reduces current investment and an anticipated rise in future military threat stimulates current investment. But when the utility function is nonseparable between consumption and the weapon stocks, a current military threat may not decrease the short-run investment. In the long run, capital accumulation is independent of the military conflicts among countries regardless of the form of the utility function.