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

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  • Chu, Angus C.

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8320.

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Date of creation: 18 Apr 2008
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Handle: RePEc:pra:mprapa:8320

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Keywords: endogenous growth; Leviathan taxation; interstate competition; endogenous political regime;

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  1. Jody Overland & Kenneth Simons & Michael Spagat, 2005. "Political instability and growth in dictatorships," Public Choice, Springer, vol. 125(3), pages 445-470, December.
  2. Danyang Xie, 2002. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Macroeconomics 0212004, EconWPA.
  3. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  4. Rauscher, Michael, 1998. "Leviathan and Competition among Jurisdictions: The Case of Benefit Taxation," Journal of Urban Economics, Elsevier, vol. 44(1), pages 59-67, July.
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  7. Grossman, Herschel I. & Noh, Suk Jae, 1994. "Proprietary public finance and economic welfare," Journal of Public Economics, Elsevier, vol. 53(2), pages 187-204, February.
  8. Daron Acemoglu, 2007. "Introduction to Modern Economic Growth," Levine's Bibliography 122247000000001721, UCLA Department of Economics.
  9. Cellini, Roberto & Lambertini, Luca, 1998. "A Dynamic Model of Differentiated Oligopoly with Capital Accumulation," Journal of Economic Theory, Elsevier, vol. 83(1), pages 145-155, November.
  10. Pohjola, Matti, 1983. "Nash and stackelberg solutions in a differential game model of capitalism," Journal of Economic Dynamics and Control, Elsevier, vol. 6(1), pages 173-186, September.
  11. Azam Chaudhry & Phillip Garner, 2006. "Political Competition Between Countries and Economic Growth," Review of Development Economics, Wiley Blackwell, vol. 10(4), pages 666-682, November.
  12. Cem Karayalçin, 2008. "Divided We Stand, United We Fall: The Hume-North-Jones Mechanism For The Rise Of Europe," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 973-997, 08.
  13. Pohjola, Matti, 1983. "Workers' investment funds and the dynamic inefficiency of capitalism," Journal of Public Economics, Elsevier, vol. 20(2), pages 271-279, March.
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Cited by:
  1. Randall Holcombe & DeEdgra Williams, 2011. "The cartelization of local governments," Public Choice, Springer, vol. 149(1), pages 65-74, October.

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