Economic Foundations of the Territorial State System

AVIDIT ACHARYA, ALEXANDER LEE

AMERICAN JOURNAL OF POLITICAL SCIENCE

Abstract: The contemporary world is organized into a system of territorial states in which rulers exercise authority inside clearly defined boundaries and recognize the authority of other rulers outside those boundaries. We develop a model to explain how the major economic and military developments in Europe starting in the fifteenth century contributed to the development of this system. Our model rationalizes the system as an economic cartel in which self‐interested and forward‐looking rulers maintain high tax revenues by reducing competition in the “market for governance.”