Deterrence, defense spending, and elasticity: Alliance contributions to the public good

There are two methods that are often used to determine the allocation process used by members of an alliance supplying the public good of deterrence. One investigates the cross-sectional relationship between alliance members' GNPs and their defense expenditures. This group-level analysis normally assumes that income remains constant. The second centers on the interaction between the hegemonic state and the other allies. This paper presents a third method: an investigation of the relationship between size (as measured by GNP) and the income elasticity of defense spending. The paper determines the elasticity of defense spending for eighteen developed countries. It finds that smaller allies have greater elasticities than larger allies, and that alliance-membership serves to lower the alliance members' elasticity. The implications of these findings for the study of collective goods are discussed.