The Macroeconomics of Dr. Strangelove

This paper examines the weapons-accumulation decisions of two adversarial countries in the context of a deterrence / conflict initiation game embedded in an overlapping-generations model. The demographic structure permits analysis of both within -and between -country intergenerational externalities caused by past weapons-accumulation decisions, as well as of intragenerational externalities from the adversary's current weapons accumulation. Zero accumulation is a possible equilibrium with both noncooperative and cooperative behavior. Countries may also accumulate weapons to the point where conflict initiation never occurs. Pareto-improving policies are generally available, but international cooperation need not be Pareto-improving