| Sumario: | A simple two-sector model—a military sector that produces security and a civilian sector that produces consumption goods—is used to analyze the equilibrium adjustment of labor resources following a favorable shock that lowers the marginal benefits of security provided by military personnel. The analysis predicts a positive bias in military spending under the assumption that the reallocation of labor resources from one sector to another is not without cost. Upon realizing an advantageous shock to national security, the government faces a trade-off in moving labor resources to civilian production activities: Although the nation can enjoy both higher security and increased consumption, the displaced military personnel are forced to accept a lower utility than those who stay employed in that sector. If the adjustment costs are not too great, the ability to precommit would support a second-best policy that provides some protection to military personnel, while also realizing some of the increased consumption opportunities afforded by the favorable shock to national security. However, the government's inability to precommit leads to excessive protection of military workers, further limiting the adjustment of resources and the increased consumption opportunities realized in equilibrium.
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