Brown Bag Seminar by Roman Zakharenko
Speaker: Roman Zakharenko (ICEF HSE)
April 9 at 4.40 pm, room 3211 International College of Economics and Finance held a Brown Bag Seminar.Speaker: Roman Zakharenko (ICEF HSE)
Theme: «Trade Costs, Conflicts, and Defense Spending» together with Alexander Tarasov and Michael Seitz
Venue: Shabolovka str. 26, building 3, room 3211
Abstract: We propose a model in which countries jointly make decisions of bilateral trade, military conflicts with each other, and unilateral defense spending. A military conflict increases the cost of trade; a greater initial trade volume leads to greater welfare losses in case of conflict, and thus makes conflict less likely. Defense spending improves welfare in case of conflict; therefore countries with greater conflict probability spend more on defense and, conversely, greater defense spending increases conflict probability. An exogenous reduction of trade costs for a pair of countries causes both to cut defense spending, which causes a domino effect on defense spending by other countries. We estimate the model parameters using data on trade, conflict incidence, and defense spending. We find that conventional trade models, which do not incorporate military conflicts and defense spending, underestimate the gains from trade between the most hostile nations by at least a factor of three.