Domino Secessions: Evidence from the US

We analyze how secession movements unfold and the interdependence of regions' decisions to secede. We first model and then empirically examine how secessions can occur sequentially because the costs of secession decrease with the number of seceders and because regions update their decisions based on whether other regions decide to secede. We verify the existence of these "domino secessions" using the canonical case of the secession of southern U.S. states in the 1860s. We establish that financial markets priced in the costs of secession to geographically specific assets (state bonds) after Lincoln's election in the fall of 1860 – long before war broke out. We then show that state bond yields reflect the decreasing costs of secession in two ways. First, as the number of states seceding increased, yields on the bonds of states that had already seceded fell. Second, seceding states with more heterogeneous voters had higher risk premia, reflecting investors beliefs that further sub-secession was more likely in these locations.