Applying the System Asset Pricing Model to U.S. Defense Procurement: Measuring the System Welfare Cost of Monopoly Rent and Structural Inefficiency

Defense procurement destroys 4.88 in public welfare for every 1 of excess private gain

The System Asset Pricing Model (SAPM) reveals a system welfare beta of 4.88: each dollar the Big Five capture beyond competitive returns costs the public 4.88. The system-adjusted payoff is −131 billion per year.

• Private payoff Π = $56.5B/yr (Big Five operating income + monopoly rent)
• System welfare cost W = $164B/yr [90% CI: 143–187B]
• System-adjusted payoff Πˢᴬ = −$130.7B/yr

If you know CAPM, you know SAPM

CAPM asks what return investors require for risk; SAPM asks what return the public receives given system welfare costs. The formula: Πˢᴬ = Π − βw · W.

• CAPM: E = Rf + βi(E − Rf)
• SAPM: Πˢᴬ = Π − βw · W
• βw = 4.88 means welfare cost per $1 excess private gain

$350 billion annual procurement, but competition is a myth

DoD obligates ~$350B/yr on procurement and RDT&E. Yet genuine competition on major weapon systems is only 15–40% of dollars, and 46% of contract dollars are cost-reimbursement.

• FPDS competition rate ~54% masks 15–40% on major systems
• Cost-plus contracting rewards inefficiency: 45% of FY2024 dollars
• Sentinel ICBM overran 81% ($63B); F-35 fleet availability 50% vs 67% minimum

Welfare destruction runs through six measurable channels

I decompose $164B/yr into six channels, each with independent empirical anchors from GAO, DoD IG, RAND, and OpenSecrets.

• Cost overrun & X-inefficiency: $67–93B/yr
• Monopoly rent extraction: $28–42B/yr
• Opportunity cost of misallocated capital: $35–52B/yr
• Readiness degradation: $18–27B/yr
• Political-economy distortions: $7–14B/yr
• Governance & institutional failure: $12–22B/yr

βw = 4.88: welfare cost per dollar of excess private gain

With Π = 56.5B, competitive baseline Πc = 22.8B, and W = $164.4B, the welfare-ratio beta is 4.88. Monte Carlo (100,000 draws) confirms βw > 2.0 in 97.8% of scenarios.

• Headline βw = 0.37 (channel-weighted) vs 4.88 (welfare-ratio); see §5 reconciliation
• Marginal beta = 4.7, near average — PSF concavity confirmed
• Break-even governance μ* = 0.68: reforms must neutralize 68% of W

You cannot tax a cost overrun the contract was designed to produce

Pigouvian taxation requires a competitive baseline; none exists with five sellers and one buyer. Coasean bargaining fails because property rights are ambiguous, transaction costs astronomical, and the 'court' is Congress — whose members receive 3.5× more from defense donors when they vote for higher spending.

• Cost overrun is not an externality; it's the contract's mechanism
• FAR + DFARS exceed 2,000 pages; compliance costs billions
• Congressional donors: 151,722 for pro-spending votes vs 42,967 for against

Defense procurement is high-severity, high-tractability

At βw = 4.88, defense procurement is more welfare-destructive per dollar than antimicrobial resistance (βw = 2.1) but less than PFAS (35.2). Tractability is high because distortions are statutory, not physical.

• Comparable to auto emissions (βw = 6.8) when scaled
• Far below ERCOT grid failure (βw = 2,053 — acute event)
• Every channel traceable to a statute, regulation, or political incentive

International comparators show 30–60% lower costs for equivalent capability

Sweden's Gripen costs 22,100–36,200/flight hour vs F-35's 35,000–50,000+. South Korea's K9 and Israel's Merkava demonstrate that competitive procurement is achievable.

• Gripen: 30–60% lower operating cost than F-35
• SpaceX, DIU/OTA show 30–60% cost reductions domestically
• μ* = 0.68 is ambitious but within proven envelope

Reforms must neutralize 68% of welfare cost to break even

The break-even governance parameter μ* = 0.68 means reforms must cut W by 68% to make Πˢᴬ ≥ 0. This is achievable via firm-fixed-price mandates, genuine competition requirements, and structural de-consolidation.

• Firm-fixed-price mandates remove cost-plus incentives
• Genuine competition: require 50%+ of MDAP dollars competed
• De-consolidation: break up Big Five dominance

The system destroys 3.10 in welfare per 1 of private gain — and can be fixed

The defense procurement system is not a physical externality; it is a market-structure failure sustained by identifiable statutes and incentives. Every channel can be reformed by Congress or executive action.

• No impossibility theorem — this is institutional PST
• Political equilibrium is the binding constraint, not physics
• The question is not whether correction is possible but whether it will be permitted