DETERRENCE-DRIVEN GROWTH

LARROSA, JUAN M.C.

Buenos Aires

Congreso; XLV REUNIÓN ANUAL DE LA ASOCIACIÓN ARGENTINA DE ECONOMÍA POLÍTICA; 2010

ASOCIACIÓN ARGENTINA DE ECONOMÍA POLÍTICA

Two countries face a strategic interdependence for keeping deterrence through the investment in defense (non-productive) capital. Each country embarks in an arms race facing the other for keeping deterrence. Individually both economies determine its balanced growth path by taking into account this interdependence in different grades of awareness. We adapted a twoagent dynamic setting and found a Markov Perfect Equilibrium (MPE) and an open-loop equilibrium reflecting these different degrees of reaction. Main results resemble each other but growth rates will be higher when strategies are dynamically updated. Empirical evidence support partially both results.