Borrowed Power: Debt Finance and the Resort to Arms

Branislav L. Slantchev

Abstract

Military expenditure is often funded by debt and war losers often repudiate some or all of their obligations. Since governments tend to repay their debt in peace or victory, negotiated settlements become inefficient and can affect crisis bargaining and war termination. I analyze a complete-information model in which players can determine the distribution of power through their military allocations before attempting to reach a peaceful bargain. I show that players might borrow to improve their military capabilities even when doing so will make it impossible to settle the dispute without fighting. This new explanation for war is not driven by commitment problems or informational asymmetries but by the inefficiency of peace imposed by the need to repay the debt. War is the result of actions that eliminate the bargaining range rather than inability to locate mutually acceptable deals in that range, as the traditional explanation has it.

Keywords:

war finance, wartime debt, crisis bargaining, war termination