How defense shapes the institutional organization of states

Abstract

We theoretically analyze how the provision of military services explains the vertical and horizontal fragmentation of a state. The model innovates on the previous political economy literature that views these institutional arrangements arising only as a response to internal "technological" forces, and not to strategic interactions within the state and with the neighboring states. The model explains how these interactions lead communities of individuals to choose among three alternative types of institutional arrangements: 1) a Union, i.e., a setting where both the vertical and the horizontal fragmentation of the state are minimized; 2) an Alliance, where vertical fragmentation is increased through the creation of an upper government tier devised to take advantage of economies of scales; 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 defines the conditions under which each alternative institutional arrangement emerges as equilibrium.