International Security, Multiple Public Good Provisions, and The Exploitation Hypothesis

Toshihiro Ihori, Martin McGuire, and Shintaro Nakagawa , Defence and Peace Economics 25(3) , 213-229 , June 2014.

Since the 1960s Olson-Zeckhauser’s (1966) analysis, its ‘exploitation of the great by the small’ has provided economists’ core model of alliance’s provision of security/defense. But with the end of the Cold War, countries’ allocative behavior has diverged markedly from OZ’s predictions for defense as a homogeneous pure public good voluntarily provided. This paper suggests a replacement for OZ, with the essential difference that ‘defense’ rather than being aggregated into their single public good is disaggregated into more realistic categories of self-insurance and self-protection. Because allocative behavior in public good groups is essentially driven by income effects, we concentrate on these, which become complex and conflicted, giving much greater scope for goods-inferiority. The analysis is followed by numerical simulations, which conform to actual experienced allocations in NATO much better than the conventional ‘exploitation’ model.

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