Equilibrium National Border and Its Stability

Abstract

This article analyses a model in which the national border is determined non-dictatorially by being based on citizens' preferences. Each country faces a trade-off in terms of social welfare when considering whether to increase its size. As a country's size increases, the government can collect more taxes and provide more public goods, which, all else equal, makes its citizens better off. On the other hand, a country that increases its size is assumed to also increase the heterogeneity of its citizens' preferences leading to increased mismatch between preferences and the public goods provided by government. Notwithstanding the benefit of greater quantities of public goods afforded by living in a larger country, greater dissatisfaction with the public goods provided by government (i.e. preference mismatch) makes some segments of the citizenry worse off. Contrary to Alesina and Spolaore (1997), we show that a symmetric national border may be unstable. We also examine whether voluntary declaration of nationality guarantees the social optimum. Despite economies of scale from unification, the model implies that, from a social welfare perspective, there may be either too few, or too many, countries. Unification leading to fewer countries can be social welfare enhancing if people's preferences in those states are quite similar; secessions leading to a greater number of smaller states can be social welfare enhancing if preferences are sufficiently heterogenous.