The value of North Atlantic Treaty Organization option for a new member
The value of North Atlantic Treaty Organization option for a new member
Sunday, October 11, 2015: 11:55 AM
The paper introduces a welfarist approach to the national safety of a country with membership in a defense alliance as an option. The members are heterogeneous and subjects of a country-specific safety classification. There are two public goods, the domestic military budget and the incremental safety provided by the membership in the alliance. The commitment of the alliance in the creation of safety is, however, imperfect. A sufficient condition is stated for the non-membership. Necessary conditions are stated for a positive option value of the membership. Several adverse incentive effects shaping the option value are identified, including the incentive to free ride in domestic defense investment and a moral hazard effect in terms of reduced national commitment to the domestic defense effort.
The option value is increasing in the additional safety provided by the alliance. It is decreased by a retaliation effect from a potential enemy. The option value is also decreasing in a moral hazard effect, created by opportunistic behavior of the member. That is the willingness to defend with a country's own army resources might be smaller in an alliance, when the nation is waiting for help from the alliance.
The cost of participation is determined in the spirit of the median voter theorem. The equilibrium is shown to be of two potential types, a stable alliance equilibrium with a positive mass and or a degenerate one with one member only. The driving force in the adjustment of the coalition size is the size of alliance relative to the safety class of the median voter.