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.

Abstract

Is the European nation-state system more favorable to economic growth than the united-empire system in ancient China? This paper develops an endogenous-growth model to analyze the conditions under which economic growth is higher under political fragmentation than political unification. Under political unification, the economy is vulnerable to excessive Leviathan taxation and 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 the heterogeneity costs are sufficiently high relative to the mobility cost of citizens or equilibrium defense spending, then political fragmentation would be more favorable to growth than political unification. When the political regime is endogenously chosen by rulers, they do not always choose the growth-maximizing regime. In particular, there exists a range of values for the heterogeneity costs, in which political fragmentation is more favorable to growth but the rulers prefer political unification.

• Item Type: MPRA Paper
• Language: English
• Keywords: endogenous growth; Leviathan taxation; interstate competition; endogenous political regime
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; H - Public Economics > H5 - National Government Expenditures and Related Policies > H56 - National Security and War

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