Discussion Paper 2010-01

JEL Classification: D74, F02, F11, H56, H77


We construct a trade-theoretic model of two open economies which are in conflict with each other. War efforts - which involve the use of soldiers and military hardware - are determined endogenously. The purpose of war is the capture of land containing a natural resource like diamond, but the costs are that lives are lost and production sacrificed. The capture of mining land helps to reinforce the war by using profits from the sale of the natural resource to purchase arms. We examine the effect of a number of policy instruments available to the international community (such as foreign aid, a tax on arms exports and on the export of the natural resource from the war areas) on war efforts. We identify the role of the 'protective' nature of arms, and of income effects of the policy instruments, on the results.