A formal model of arms market with cash-for-favours

Both corruption and market imperfections are important facets of modern arms markets. In the standard literature of arms market, production, procurement, sales (exports) and purchases (imports) of arms take place in the shadow of corruption. Corruption is an integral part of the environment of the arms trade that exerts an influence upon the outcome in the arms market. In our work, we make corruption as a choice variable of the powerful players in the global arms market and examine the equilibrium consequence of corruption that is strategically chosen by armament firms. We develop a simple duopoly to characterize a perfect Nash equilibrium of cash-for-favors and establish perplexing comparative static properties of this equilibrium. The primary intuition here is that cash-for-favors can have serious impacts on the equilibrium of an oligopoly through their effects on the incentives of and constraints on individual firms. We offer a model of endogenous corruption, to our understanding for the first time, to examine the global arms market in order to establish that the equilibrium outcome in the arms market cannot be fully captured by the standard results of oligopoly. Researchers have to extremely careful in applying the standard tools of oligopoly to the arms market as our results suggest that endogenous corruption can reverse most of the known results of oligopoly.