The McGuire model and the economics of the NATO alliance

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Abstract
This paper uses a Stone‐Geary welfare function as a basis for estimating a system of expenditure equations for each NATO country. These estimates are for the following aggregates: defence expenditure, non‐defence public expenditure and private expenditure. The model estimates are directly derived from the utility function. Supply side estimates are also made, thus, unlike some earlier estimators, allowing full information maximum likelihood estimation of a fully simultaneous system of equations. The period covered is 1960–1985. A naive a priori view might be that defence as a pure public good would be inversely related to an ally's expenditure and directly to an enemy's. This is not borne out. In no instance do we find the naive public goods model fitting the NATO context. One either finds competitive behaviour between allies or apparently selfless commitments to taking on more than a “fair” burden of the response to increases in the threat.

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