Mixed public‐private benefit and public‐good supply with application to the NATO alliance

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Abstract
This paper examines the issue of defence impurity of benefits on both the demand and supply side. In particular, imperfect substitutability of defence benefits between allies and unequal cost advantages between allies are incorporated into models of public‐good provision. Alternative versions of partial substitutability on either the benefit or cost side are modeled. These alternatives emphasize a crucial distinction between emitters and absorbers of defence spillovers. Theoretical results are related to the behavior of allies in the NATO alliance. In addition, the paper derives reduced‐form equations that would enable econometric estimates to distinguish the degree of substitutability and the underlying allocative process ‐ i.e., Nash‐Cournot or Lindahl processes.

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