The present paper documents that political stability is positively associated with the extent of domestic trade. In explaining this reg- ularity, we provide a model where political cohesion is linked to the emergence of a fully functioning market economy. Without market ex- change, the welfare of inherently selfish individuals will be mutually independent. As a result, political negotiations, echoing the prefer- ences of the citizens of society, will be dog-eat-dog in nature. Whoever has greater bargaining power will be willing to make decisions that en- hance the productivity of his supporters at the expense of other groups in society. If the gains from specialization become su¢ ciently large, however, a market economy will emerge. From being essentially non- cooperative under self-sufficiency, the political decision making process becomes cooperative in the market economy, as the welfare of individ- uals will be mutually interdependent due to the exchange of goods.
SAMHÄLLSVETENSKAP -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)
SOCIAL SCIENCES -- Economics and Business -- Economics (hsv//eng)