General equilibrium analysis on arms exports to developing countries in conflict

In this paper a conflict game between the two developing countries is constructed. It is assumed that all the weapons are imported at the fixed world price, pM, and the consequence of the decline of pM is examined. In specifying the utility and production functions in general equilibrium (GE) model by Cobb-Douglass type, we actually derive the reaction functions of GE conflict game. We examine the effect of the decline of pM on the “existence” of solution to the game, its “stability”, and finally on the utility levels of two countries in the “stability” case. The special feature of the model is each country's armed forces cause external diseconomy to the other's production. By constructing 10000 games, we show that as pM falls, the number of “non-existence” cases increases, the percentage of “instability” cases rises, and finally as pM falls, the percentage of “rising utility levels of both countries” cases. Finally we derive the reaction functions in this conflict game when two countries have domestic military industries.