Economic Theory of Alliances: Sixty Years Later

Abstract

The main purpose of this retrospective of the economic theory of alliances is to characterize three basic paradigms: purely public deterrence, spatial connectivity, and joint products. For each model, allies’ military expenditure (ME) responds differently to the aggregate ME of the other allies, known as defense spillins, thereby resulting in diverse burden sharing, allocative implications, membership composition, and institutional recommendations. The underlying theoretical models determine reduced-form equations for allies’ interdependent defense demands. We examine how changes in strategic doctrines, weapons technology, enemy threats, and membership composition affected NATO burden sharing and its allocative efficiency over time. Generally, changes that increase the share of excludable defense benefits possess a better prognosis for burden sharing and allocative efficiency. Principles and insights from the economic theory of alliances are related to defense demands at the operational level and for non-NATO alliances.