A DYNAMIC-MODEL OF CAPITAL AND ARMS ACCUMULATION

How does competitive arms accumulation affect investment and capital a ccumulation? In a dynamic optimization framework including both invest ment and military spending, we find that, when the utility function is separable between consumption and the weapon stocks, an unanticipated rise in current military threat reduces current investment and an ant icipated rise in future military threat stimulates current investment. But when the utility function is nonseparable between consumption and the weapon stocks, a current military threat may not decrease the sho rt-run investment. In the long run, capital accumulation is independen t of the military conflicts among countries regardless of the form of the utility function.