Economies of Scale in Provision of Defense

In this paper we analyze the presence of economies of scale in Defense, examining the economic reasoning behind economies of scale for such a public good. We discuss this issue looking at warfare from a modern perspective, which recognizes the fact that Defense enjoys certain powers of exclusion and hence a non-zero marginal cost. This means that Defense production does not behave like a pure public good. We therefore put forward the rationale for and against the existence of economies of scale in this domain. Furthermore, an empirical study is carried out on a sample of 74 countries from 10 regions, during the period 1988-2010. In aggregate terms, our findings enable us to confirm the existence of economies of scale in Defense, suggesting that any increase in a country's population will lead to a lower rate of growth in military spending. When we study the presence of economies of scale on a regional level, we find that the outcomes obtained in aggregate terms are generated by the results of four regions that encompass 53 of the 74 countries considered in the study. Specifically, economies of scale in Defense are present in East Asia, Europe, the Middle East and Sub-Saharan Africa, whereas diseconomies of scale are found in Central America and the Caribbean, North Africa, Oceania, South America and South Asia. For North America no significant results have been obtained. In addition, we have likewise conducted tests to control for the countries' wealth, and also for time sub-samples. Our results indicate that richer countries have a higher military expenditure, that is, these countries not only defend the population but also their wealth. Finally, we observe a markedly different behavior in each one of the time sub-samples in the cases of North America and Oceania.