Chapter 1 Conflict in the Presence of Arms Trade: Can Foreign Aid Reduce Conflict?

We construct a specific-factor trade-theoretic model for two small open economies that are in conflict with each other and where war efforts are determined endogenously. War efforts involve the use of soldiers and imported military hardware. The purpose of war is to capture disputed land or some other resource, but with war lives are lost and production is sacrificed. In this framework, we examine the effect of foreign aid on the war efforts in the warring countries. We find, inter alia, that an increase foreign aid to the warring countries may increase war efforts when arms protect lives in a significant way.