Arms build‐up and arms race in optimal economic growth

I analyze a model of strategic interdependence between two economies linked by investments in defensive capital for deterrence purposes. I adapt a two‐agent dynamic setting where weapon production affects consumption. Individually both economies determine their balanced growth path by taking this interdependence into account in different grades of awareness. I associate two types of equilibria with internal or external determinants for defense production analogous to scenarios of arms build‐up or arms race. I find that a defense sector is compatible with economic growth but a tight arms race can harm growth.