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US military contracting has been plagued by systematic corruption, fraud, and waste during both times of peace and war. These outcomes result from the inherent features of the US military sector which incentivize unproductive entrepreneurship. The paper aims to discuss these issues.

Drawing on the insights of Baumol (1990) as their base theoretical framework, the authors explore how the industrial organization of the US military sector creates incentives for unproductive entrepreneurship. Evidence from US government reports regarding US efforts in Afghanistan and Iraq is provided to illustrate the central claims.

The military sector is characterized by an entangled network of government bureaus and private firms whose existence is dependent on continued government spending. These realities, coupled with a dysfunctional procurement processes, reward unproductive behaviors during peacetime. During wartime these incentives are intensified, as significant emergency resources are injected into an already defective contracting system. The recent experiences in Afghanistan and Iraq illustrate these dynamics.

The authors make three main contributions. First, contrary to common treatments by economists, much military spending fails to meet the definition of a public good. Second, waste, fraud, and abuse in military contracting is a result of rules and the incentives those rules create. Third, the only way to change the situation is to change the overarching rules governing the people operating in the military sector.