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About this book

In this book the authors demonstrate how the economics of insurance, risk reduction, and damage control or limitation can be combined with concepts of collective choice and collective behavior to improve analysis of the escalating threats faced by alliances throughout the world.

The book develops a theory of risk management as integrating likelihood of loss, magnitude of loss, and isolation from loss into a consolidated model. It extends existing concepts of individual risk management by a single person to decision theory for an entire country, managed by a government bureaucracy and lodged in a universe of overlapping alliances.

The authors uncover a tendency, inherent in any bureaucracy for policy coordination in the realm of risk control to fail because of misunderstanding, disinterest, or perverse incentives. Understanding such incentives is essential to any sort of progress in risk management of proliferating national and global threats.

Self-protection aims to reduce the chances of loss. This reduction may require the use, or threat or promise of use, of defensive military weapons or, depending on context, the use of offensive military weapons. Japan's constitution limits Japan to use of defensive measures only, even if Japan and the USA have formed a military alliance. This places Japan at an “economic corner solution” of providing only self-insurance. However, the Abe government intends to change the interpretation of the constitution so that Japan can provide a full range of self-protection as well as self-insurance. With the prospect of such constitutional change, this book becomes of special relevance to Japan's national security.

Table of Contents

Frontmatter

Chapter 1. Introduction and Summary of the Book

Abstract
In the aftermath of World War II and height of the Cold War, the normative approach to the economics of alliances seemed paramount. Historically, an alliance formed when academic economics strived to assist the beleaguered civil and uniformed servants who were trying to formulate and execute policy. However, due in part to the Vietnam War and especially by the end of the Cold War, the gap between academic economics and policy implementation widened. This book develops a theory of risk management with public goods, integrating the likelihood of loss, magnitude of loss, and isolation from loss into a consolidated model of alliances. It extends existing concepts of individual risk management by a single person to decision theory for an entire country, managed by a government bureaucracy and lodged in a universe of overlapping alliances.
Toshihiro Ihori, Martin C. McGuire, Shintaro Nakagawa

Chapter 2. Risk Management and International Security

Abstract
Economics of national security or international security is so immense a topic as to be intimidating. As in most of economics it has both positive and normative components. The goal of this chapter is to offer examples of both. Positive analyses, attempt to understand the economic origins of conflicts among nations and the economic foundations of success or failure in these conflicts.
Toshihiro Ihori, Martin C. McGuire, Shintaro Nakagawa

Chapter 3. One-Dimensional Public Goods in Models of Alliance

Abstract
An interesting application of non-cooperative private funding of public goods arises in international security and national defense. In their classical article on the economic theory of alliances, Olson and Zeckhauser (1966) demonstrated that countries may allocate some fraction of national income to international (or regional) public goods (for example, special trading agreements, formation of international organizations, military preparedness, active international diplomacy, foreign aid) to reduce regional and international tension and to avoid random emergency costs.
Toshihiro Ihori, Martin C. McGuire, Shintaro Nakagawa

Chapter 4. Defense Expenditures and Allied Cooperation in Conflicting Alliances

Abstract
This chapter investigates how the cooperation of members of an allied bloc influences their welfare when that bloc opposes another bloc. This question is related to cooperative and non-cooperative defense spending in the confronting blocs such as the NATO and the WTO in the Cold War. By addressing this question, we can explore how voluntary provision of an international public good within allied countries protects against national emergency from the adversarial alliance.
Toshihiro Ihori, Martin C. McGuire, Shintaro Nakagawa

Chapter 5. Self-protection and Self-insurance Against Adversity

Abstract
Based on Ihori and McGuire (2007), this chapter first investigates the impact of self-protection on alliances and then, based on Ihori and McGuire (2010), considers the impact of self-insurance as well as self-protection on security spending. We extend existing analyses of self-insurance and self-protection that countries may implement at a national level in pursuit of their security. That is, we provide an analysis of odds-improving self-protection and cost-reducing self-insurance when they yield collective benefits to allied groups, such as alliances of nations, for whom risks of loss are public bads and prevention of loss is a public good.
Toshihiro Ihori, Martin C. McGuire, Shintaro Nakagawa

Chapter 6. Exploitation Hypothesis and Numerical Calculations

Abstract
The purpose of this chapter is twofold. First, we theoretically analyze simultaneous optimization of both self-protection and self-insurance by two countries facing the common risk of a disastrous event to derive simple analytical rules in the distribution of contributions. In this analysis, we provide a new perspective from the theory of collective risk management to reveal how allies share the burden of self-insurance and self-protection public goods. Second, we utilize our model to conduct numerical simulations of burden sharing in NATO from 1970 to 2010. In this simulation, we show that whether the conventional exploitation hypothesis holds depends on the risk profile that NATO faces. Our calculated results closely simulate the actual development of the military spending to GDP ratio.
Toshihiro Ihori, Martin C. McGuire, Shintaro Nakagawa

Chapter 7. Threat Misestimations and the Role of NGOs

Abstract
In this chapter, we investigate the impacts on collective risk management of mistakes made in estimating the severity of a threat. In general, in the real world, it is difficult for policymakers to make precise estimates of threats to their country. Although the governments intend to collect precise information on threats, the collected information can contain significant errors and is also often biased in bureaucratic administrative processes. Moreover, interest groups try to influence the evaluation of the information and the policymaking process through lobbying. Using the alliance model developed in this book, we examine how misestimation of a threat affects burden-sharing among allies. Allies may “over”-estimate the threat so that the estimated level is higher than the true level of the threat. We will show that if an ally overestimates the threat to an alliance, it may contribute more to the public goods than when its estimates are accurate.
Toshihiro Ihori, Martin C. McGuire, Shintaro Nakagawa

Backmatter

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