How can military service retention policies internalize the informational asymmetry over individuals’ preferences over pay and non-pay remuneration?

For an all volunteer force, one of the key determinants of retention is military pay. Military pay is determined by a number of factors, including various market forces, relative scarcities of required personnel, earnings in similar civilian occupations, and special features of the military job. The military salary frequently consists of pay, allowances, and benefits-in-kind (Sandler & Hartley, 1995). The last one frequently includes housing, medical support, training, recreational activities, etc. Thus, the military employer should strive to make the net market value of military benefits equal to the net benefits of a similar civilian job (Sandler & Hartley, 1995). Since different recruits to the military will prefer different wages-benefits combinations, the military employer should attempt to select the cheapest compensation package satisfactory to each individual recruit. This may be very difficult, however, whenever it is costly or impossible to discriminate between individual preferences (Sandler & Hartley, 1995).

One economic model of military compensation suggests several complementary approaches for mitigating such difficulties. One, is to separate military occupations that have close civilian equivalents from those that don’t (Sandler & Hartley, 1995). Another, is to convert nonmonetary military compensation into monetary form, to make the comparisons easier. And the final approach, is to make sure that the military employees are paid according to their contribution, at levels comparable to their civilian counterparts (Sandler & Hartley, 1995).

References

Sandler, T., & Hartley, K. (1995). The Economics of Defense. Cambridge: Cambridge University Press.

Can a recession negatively affect military recruitment?

A major economic recession in the early 1970s, which was caused by the first oil crisis, resulted in mass unemployment among young people. While this was the case, the armed forces found it relatively easy to meet their recruiting goals. Not surprisingly, during that time, the idea of a lifetime military career was seen as being very attractive (Lescreve, 2000). On the other hand, the end of the 1990s saw a rapid growth in the economies of most Western countries. At the same time the armed forces of those countries were experiencing increasing difficulties in recruiting required numbers for their ranks (Lescreve, 2000). Hence, in most cases, a recession doesn’t seem to be able to have a negative effect on military recruitment.

References

Lescreve, F. (2000). Recruiting for the military when the economy is booming. In: Changing Mission for the 21^st century. 36th International Applied Military Psychology Symposium. Croatia, Split. Retrieved from http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA412525#page=146.

What is the best way for sharing the economic burdens of a military alliance?

According to Pincus (1965, p. 58), there is no consensus or mechanism for reaching it, on such issues as measuring different countries’ capacities for efficient production of military equipment, for meeting a share of the total costs of a military alliance; estimating the benefits of a military alliance to any particular country; and consequently coming up with a system that would equitably reflect those benefits.

One common normative approach to all types of burden sharing is the ability-to-pay principle. According to this assumption, defence contributions should be progressive, very much like a domestic income tax. Such an approach would involve measuring each country’s income in terms of such measures as GNP, and them asking the countries with higher incomes to pay progressively larger shares of the common defense expenditures of the alliance (Pincus, 1965, p. 59).

Carrying this scheme out has proved to be impossible, however, in part because economic analysis has never been able to give a good answer to the question of what degree of progressiveness would be most equitable (Pincus, 1965, p. 59, 60).

Whatever may be the best way for sharing the economic burdens of a military alliance, empirical evidence from 1960 shows that the United States has contributed to combined NATO defense expenditures, during that year, considerably more than can be expected from using all but the most progressive exchange-rate and real-income formulas (Pincus, 1965, p. 76).

References

Pincus, J. (1965). Economic Aid and International Cost Sharing. Baltimore: The Johns Hopkins Press.

What intra-alliance problems and procurement issues are generated by the need to meet the strategic airlift needs of the NATO Response Force?

To achieve its airlift goals, NATO has come up with three solutions. The simplest and the oldest solution involves using the national airlift capabilities of member countries to transport the NATO Response Force. Owing to the great differences in airlifting capabilities of different countries, it is not surprising that following this approach has resulted in the burden of providing strategic airlift capacity for NATO being unequally shared among the members of the alliance. In fact, the US has largely shouldered this burden since the creation of the alliance. More recently, Canada and the UK joined US in helping to transport the troops of the alliance around the world (Hood, 2009). However, NATO will have trouble airlifting its NATO Response Force across the world if it continues to rely solely on current or future national capabilities of these countries. This is because US, Canadian, and British airlift capabilities are constantly burdened by the respective national commitments of these countries, leaving little room for catering to the needs of the alliance (Hood, 2009). Moreover, the existing strategic airlift fleets of the three countries will sooner or later reach the end of their lifespan; which will happen sooner rather than later if they continue to be used for the purposes of the alliance, on top of national interests. Also, the aircraft may simply be unavailable in times of need due to being on maintenance or being used for national commitments. So borrowing it to serve the needs of the alliance may often be simply impossible (Hood, 2009).

Thus, the mainland European nations face special difficulties when it comes to strategic airlifting. To overcome this problem NATO made a special agreement, called the Prague Capabilities Commitment, aimed at developing an airlift capability for Europe, specifically (Hood, 2009). To achieve this goal NATO signed contracts for developing and producing Airbus A400M aircraft for the European members of the alliance. But the procurement of A400M had its problems. Delays in production stalled its release until 2013. Moreover, A400M cannot transport tanks or heavy artillery that the alliance’s strategic airlift is expected to do (Hood, 2009).

Hence, a second solution for solving NATO’s strategic airlift problem was developed. It involves having its members form a commercial partnership and then using this partnership to purchase the required transport aircraft for the alliance (Hood, 2009). The rationale behind such a partnership is that sharing a few airplanes is more cost-effective than having each of the needy alliance members buy its own transport aircraft. The partnership that ten NATO members and two non-NATO countries formed for this purpose is called Strategic Airlift Consortium (SAC). And soon after its creation, SAC obtained three C-17 airplanes; two were purchased and one was donated by the United States (Hood, 2009).

The third solution, for meeting the strategic airlift needs of the NATO Response Force, consists of alliance members forming a commercial partnership and then utilizing this partnership to lease aircraft from the private sector. To this end, 15 NATO nations and one NATO partner nation formed such a partnership. It is called the Strategic Airlift Interim Solution (SALIS). Soon after its inception, SALIS started renting flight hours on Russian and Ukrainian An-124-100 aircraft (Hood, 2009).

However, using An-124 is not without its problems. For example, not long ago a contract dispute regarding the usage of one An-124 was sorted out in court for more than a year, during which, not surprisingly, the airplane could not be used because it was under “ramp arrest.” The influence of foreign governments may also affect the availability of such aircraft (Hood, 2009). For example, while a Russian aircraft charter company may not want to break contracts with SALIS, a conflict between the interests of the Russian government and NATO, may cause the Russian government to exert undue influence on the Russian charter company to make the required aircraft unavailable to NATO. Moreover, this may take place, whether by design or by accident, during a critical mission, where failure is not an option (Hood, 2009).

References

Hood, J. D. (2009). NATO Strategic Airlift: Capability or Continued US Reliance? Retrieved from http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA539589.

Are relative completeness of contracts and of contract governance arrangements necessary conditions for successful procurement?

Contracts can be, and are often deliberately designed to be incomplete. This is because there is a trade-off between the present costs of drafting a more complete agreement and the later inefficiencies stemming from the absence of exhaustive arrangements. Hence, environmental complexities that increase the costs of contract drafting can be expected to lead to lower completeness of the most efficient contracts, while more exhaustive contracts can be expected to be drafted only under conditions of increased potential for later inefficiencies. Consequently, the degree of contractual completeness is a product of an attempt by the parties involved to minimize the net economic costs of contractual exchange (Crocker & Reynolds, 1993).

Defense procurement normally involves high, reoccurring investments into relationship-specific assets provided by a relatively small group of highly specialized contractors. Moreover, due to extensive lead times and costs of development and production of major weapons systems, the government ends up being tied to particular contractors once the contract is signed and the work begins (Crocker & Reynolds, 1993). Consequently, there is a high administrative burden on the government, which involves the selection, governance and compensation of multiple private contractors. As a result, detailed procurement regulations have been developed to substantially reduce this burden. These regulations list the duties of the contracting parties, as well as the methods of conflict resolution between them; and provide the structure for the design of permissible contractual agreements (Crocker & Reynolds, 1993). Consequently, the governmental contractual officers are expected to take environmental factors into account and following the relevant regulations select the most appropriate contract from among the alternative forms open to them, subject to more senior approval. In spite of this considerable amount of regulations, the various forms of contract which can be chosen by the contractual officers from among the alternatives, allow them to choose contracts with various levels of completeness (Crocker & Reynolds, 1993).

Contractual compensation is particularly sensitive to the degree of completeness inherent in the contract which outlines it. The most restrictive and complete contract in this respect, is the “firm-price” contract, which sets a fixed price and declares that this fixed price will remain unchanged irrespective of future events (Crocker & Reynolds, 1993). Other types of contracts allow the price to fluctuate to various degrees due to possible future events, and thus carry various degrees of risk of future difficulties, if the future event does not fall neatly into any of the categories outlined in the contract. The most flexible and the least complete contract of this type is the one which allows for the periodic negotiation of nonbinding target prices (Crocker & Reynolds, 1993).

References

Crocker, K. J. and Reynolds, K. J. (1993). The efficiency of incomplete contracts: An empirical analysis of air force engine procurement. The RAND Journal of Economics, 24(1), 126-146. 

Are defense offsets economically efficient?

Defense offsets refer to a wide range of industrial and commercial benefits often demanded by the nation’s government from a foreign defense contactor as a condition of purchase of military goods or services by that government from that defense contractor (Defense Offsets Disclosure Act of 1999).

Offset transactions are classified into two types: direct and indirect. Direct offsets include those industrial and commercial benefits directly related to the military goods or services the purchaser is buying. One example, which falls into the category of Co-production, is when the purchasing government chooses one or more of its local companies to manufacture some components of the purchased equipment (Brauer, J. & Dunne, J. P., 2005). On the other hand, indirect offsets are those industrial and commercial benefits, to the purchasing country, which are not related to the military goods or services that country is buying; hence they can be either of military or civilian type (Brauer, J. & Dunne, J. P., 2005). One example of indirect offsets, which happens to fall into the category of Overseas Investment, is when the defense contractor makes investments into one or more (defense or non-defense) companies within the purchasing country.

As alluded to in the examples for direct and indirect offsets, offset transactions can also be split into various categories, which give a more specific description of the involved arrangement or exchange. These categories include Purchases, Technology Transfers, Training, Co-production, Licensed Production, Subcontracts, Overseas Investment, and Credit Assistance (Offsets in Defense Trade, 2007, 2-3).

As far as the efficiency of defense offsets goes, it appears that there is a consensus in the academic community that offsets are inefficient. According to some, the damage from defense offsets to the national security of exporting nations, together with weak security oversights, is underestimated, severe, and increasing (Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement, 2006, appx. A). Offsets redistribute component production away from top producers to less efficient producers in other countries, and thus enhance trade-distorting international patterns of production. Offsets, also, undermine the world security and the national security of exporting nations by increase the possibility for leakage of information regarding the design and production of leading edge weapons (Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement, 2006, appx. A).

Offsets create distortions in the structure of firms and industries, while also distorting the composition of national spending in the buying and selling countries. Also, as already suggested, the long term effects of offsets that fall into the Technology Transfer category are particularly damaging (Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement, 2007, appx. A). Aside from damaging the exporting nation in a number of, already mentioned, ways; in some cases Technology Transfers lead to commercial disasters for their recipients. In other cases, the recipients stop producing soon after the end of the immediate technology transfer arrangements, citing lack of customers as the main reason (Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement, 2006, appx. A).

Offsets, like other forms of “countertrade,” are economically inefficient and trade distorting; in many ways because they substitute various forms of barter for monetary transactions. They undermine free world trade by introducing market rigidities, causing growing state intervention, and by perverting production effects. An example of the latter is when offsets lead to the financing of costly infrastructure for short production runs (Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement, 2006, appx. A). In a more specific case, the defense offsets demanded by Belgium, from foreign defense contractors, undermined the capacity of Belgian defense firms for international cooperation, and made them vulnerable to structural changes in the international defense industry, and overall, have been negative for the country (Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement, 2006, appx. A).

The capacity of defense contractors to win future business can be undermined by outstanding offset obligations that they carry. Moreover, offsets may force defense contractors to resort to sub-optimal, hasty solutions in fulfilling their offset requirements, because the latter are beginning to include deadlines, time penalties, and contractual liabilities (Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement, 2006, appx. A).

References

Brauer, J. and Dunne, J. P. (2005). Arms Trade Offsets and Development. Retrieved from http://carecon.org.uk/DPs/0504.pdf.

Defense Offsets Disclosure Act of 1999, Pub. L. 106-113, section 1243 (3).

Offsets in Defense Trade: Eleventh Report to Congress. (2007). U.S. Department of Commerce, Bureau of Industry and Security. Retrieved from https://www.bis.doc.gov/index.php/forms-documents/doc_view/258-eleventh-report-to-congress-2-07

Report of the Interagency Team on Consultation with Foreign Nations on Limiting the Adverse Effects of Offsets in Defense Procurement. (2006). In Offsets in Defense Trade: Eleventh Report to Congress (appx. H). (2007). U.S. Department of Commerce, Bureau of Industry and Security. Retrieved from https://www.bis.doc.gov/index.php/forms-documents/doc_view/258-eleventh-report-to-congress-2-07

Is national defence a public good?

At its simplest, national defense can definitely be considered a pure public good if its benefits to citizens are both nonexcludable and nonrival. If no citizen can be excluded from the benefits of a certain good once that good is provided, then the benefits of that good are nonexcludable. Usually the benefits of a good are nonexcludable whenever it is prohibitively expensive to exclude anyone from enjoying those benefits. When the consumption of the benefits of a certain good by one individual in no way diminishes the amount available for consumption to other individuals, the benefits of that good are said to be nonrival (Stiglitz, 1988).

National defense, however, serves at least two functions. At one level, the defense forces are created in order to repel any attack by another country. And at another level, the presence of a powerful defense force can deter an attack by another country from happening in the first place.

Whenever national defense deters attacks on the country from occurring, it definitely functions as a pure public good, as, first, no citizen can be excluded from enjoying these benefits, and second, the consumption of the benefits of a deterred attack by one citizen, will not in any way reduce the amount of these benefits available for consumption to other citizens (Kennedy, 1975, p. 43).

However, when an attack on the country does take place and the national defense forces get mobilized to repel it; national defense clearly ceases to be a pure public good. There are several related reasons for this. When a country is attacked, one area of the country may end up consuming defense resources at the expense of another area; making the benefits of national defense subject to rivalry between different parts of the country (Kennedy, 1975, p. 43). Moreover, the military establishment always has plans and estimates regarding which parts of the country are more strategically valuable. Consequently, during an attack, the military may very well decide to abandon some parts of the country to the enemy in order to focus on defending these more strategically valuable locations. This, in effect, makes some parts of the country excludable from the benefits of national defense in the event of war (Kennedy, 1975, p. 43).

However, according to Herman Kahn (2007, p. 180) the military which, in the event of an attack on its country, plans to abandon certain parts of the country in order to defend more strategic sectors and/or allow one section of the country to consume defense resources at the expense of another, is greatly undermining a valuable objective of defense: deterrence; especially if this is a country with a relatively small military force, such as Canada. In particular, since there are great advantages to striking first, the defense force of a small military power that will be left after this first attack can be expected to be quite small (Kahn, 2007, p. 180). Consequently, a plan which under such conditions calls for focusing the remaining defense forces on trying to terminate the war by attacking the enemy’s offense, while trying to limit the damage, is unsound; as it will lead the potential enemy to believe that, should he attack, he’ll get away with almost no harm to his country. So not surprisingly, such a plan would greatly reduce the deterrent role of the armed forces of a country preparing to being attacked. Consequently, according to Kahn (2007, p. 180), the plans of the military should call for ordering the small remaining force to attack the population and industry of the enemy’s country. Such a plan would remind the potential enemy that in the event of him undertaking an attack, his country will sustain considerable damage even if his attack manages to destroy the main part of the targeted country’s defense force; so he’ll be more likely to be deterred from attacking. Consequently, if Kahn is correct, the military establishment of a small military power, which, in the case of an enemy attack, plans on focusing its remaining forces on attacking the enemy’s population and industry, has, quite possibly, turned national defense into a public good even for the case of a defensive war.

References

Kahn, H. (2007). On Thermonuclear War. New Brunswick (U.S.A.): Transaction Publishers.

Kennedy, G. (1975). The Economics of Defence. London: Faber and Faber.

Stiglitz, J. E. (1988). Economics of the Public Sector. 2^nd ed. New York: Norton.