The Breakup of Nations: A Political Economy Analysis

Abstract

This paper develops a model of the breakup or unification of nations. In each nation the decision to separate is taken by majority voting. A basic trade-off between the efficiency gains of unification and the costs in terms of loss of control on political decisions is highlighted. The model emphasizes political conflicts over redistribution policies. The main results of the paper are i) when income distributions vary across regions and the efficiency gains from unification are small, separation occurs in equilibrium; and ii) when all factors of production are perfectly mobile, all incentives for separation disappear.