Creative Destruction in the European State System : 1000-1850
We argue that the optimal level of competition between states is subject to a tradeo˙ between short-term losses and long-term gains in economic growth. In a process of creative destruction, higher quality states displace lower quality states in the market for governance at a cost. We provide evidence for both the costs and benefits of state competition using newly available data on the universe of boundary changes for all European states combined with city population data over 1000-1850. In event studies, we show that cities switching between states su˙er large transitory losses in population, while cities that end up under new governance enjoy sustained population increases. Using decomposition techniques, we then estimate the relative growth contributions of switching and unobserved state e˙ects.
We find that the estimated state e˙ects are highly correlated with data on parliamentary activity and that improvements in the quality of states occur both due to improvement of the pool of states over time as well as due to cities gravitating towards higher quality states.