How defense shapes the institutional organization of states

We analyze theoretically how the provision of military services explains the vertical and horizontal fragmentation of a state. The model innovates on the previous political economy literature which views such institutional arrangements arising only as a response to internal "technological" forces, not to strategic interactions within the state and with neighboring states. The model explains how these interactions lead communitiesof individuals to choose among three alternative types of institutional arrangements: 1) a union, i.e., a setting wherein both the vertical and the horizontal fragmentation of a state is minimized; 2) an alliance, whereby a state becomes more vertically fragmented by creating an upper government tier devised to take advantage of economies of scale; 3) autonomy, where horizontal fragmentation is maximized, as no merging of communities occurs and no higher government tier is created. A series of simulations of the model define the conditions under which each alternative institutional arrangement emerges in equilibrium.