How Elastic is the Government's Demand for Weapons?
Frank R. Lichtenberg
We attempt to make inferences about the elasticity of the government's
demand for specific weapons by analyzing the statistical relationship
between quantity and cost revisions across the population of major
weapon systems, using data contained in the Pentagon's Selected Acquisition
Reports. The cost revisions are due in part to the arrival of
technological information generated in the course of research and development.
When we standardize the data by program base year, we find that
the elasticity of demand is .55, and is significantly different from both
zero and unity. Thus, the governments demand for specific weapons is
inelastic, but not perfectly inelastic. The estimates also imply that
weapons acquisition is characterized by increasing returns: the mean and
median values of the elasticity of total cost with respect to quantity
are .78 and .72, respectively.
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