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Nation States vs. United Empire: Effects of Political Competition on Economic Growth

Chu, Angus C. (2008): Nation States vs. United Empire: Effects of Political Competition on Economic Growth.

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Abstract

Is political fragmentation (i.e. nation states) more favorable to economic growth than political unification (i.e. a united empire)? This paper develops a simple endogenous-growth model to analyze the conditions under which economic growth is higher under political fragmentation than under political unification. Under political unification, the economy is vulnerable to excessive Leviathan taxation and possibly subject to the costs of unifying heterogeneous populations. Under political fragmentation, the competing rulers are constrained in taxation but spend excessively on military defense. If and only if capital is sufficiently mobile, then political fragmentation would favor economic growth. When the political regime is chosen by the rulers, they do not always choose the growth-maximizing regime. In particular, there exists a range of parameter values, in which political fragmentation is more favorable to growth but the rulers prefer political unification.

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