The Role of Market Size in the Formation of Jurisdictions

Administrative and political reorganization is being actively debated even in the mature, stable economies of Western Europe. This paper investigates the possibility of such reorganization being tied to the integration of economic markets. The paper describes the equilibrium of a game where heterogeneous individuals form coalitions for the provision of a public good, and where the number and composition of these coalitions depend on the overall size of the market. Changes in the extent of the market put pressure on existing jurisdictions because they change both the desired public goods and, more importantly, the trade-offs that determine the borders of the jurisdictions. Thus individuals will want to renegotiate the agreements that support the existing jurisdictions and form alternative coalitions.