Politics of defence spending and endogenous inequality

We develop a model to examine regional, or geographical, allocation of defence spending in a nation, which is actuated by electoral motives of an incumbent government. We posit that the spatial impact of defence spending can be enormous as defence spending offers a host of local public goods to a regional economy and thereby determines the competitiveness of regional producers/firms in the national, or global, economy. Allocation of defence spending can thus impact on and drive regional inequality within a nation. In this sense, regional inequality is treated as an endogenous variable in our model. We explore how the politics of allocation of defence spending can create an equilibrium regional inequality in a stylized model. In a wider policy context, it is generally recognised that the efficacy of any public policies becomes problematic in oligopolistic markets as the conclusions of theoretical models are extremely sensitive to the assumed degree/nature of competition in oligopolistic markets. To overcome this general weakness of the literature, our major innovation is to make both the nature of competition and allocation of defence spending endogenous and, thereby, to provide a framework that explains both these elements. We establish that the structure of industry, conduct of rival firms, nature of competition in oligopolistic markets and regional inequality will largely depend on the proposed electoral equilibrium and, hence, will be extremely sensitive to voters’ preferences and their characteristics.