Brown University

Abstract

Historically, political competition between European countries has been viewed as being a stimulus to the innovation process and part of the reason why Europe was the first region of the world to industrialize. Countries that fell behind their rivals in technological and economic progress became more vulnerable to exploitation by their neighbors. This competition provided added incentive to innovate. This paper uses a simple model of conflict between countries to study the role of political competition on economic growth. The governments of each country are threatened politically by innovation and hence face a trade-off between the stability of their regime and 'keeping up' with their rivals. It is shown that ''institutional spillovers'', such as a decrease in the level of rent-seeking in one country, can affect growth in a competing country. Thus political fragmentation can be growth enhancing as it can result in more political competition. In the presence of scale effects in innovation, however, political fragmentation can also be growth retarding. This trade-off between political competition and scale effects is examined and applied to evidence from the historical record.