DIVISIONS OF LABOUR, SPECIALIZATION AND THE ENFORCEMENT OF A SYSTEM OF PROPERTY RIGHTS: A GENERAL EQUILIBRIUM ANALYSIS

Abstract. This paper uses a model of endogenous theft and endogenous network division of labour to formalize some of the main principles of the economics of the state and to explore related issues concerning why new constitutional rules emerge and evolve. The model suggests that fiscal competition between states facilitates important circular effects, which propel improvements in economic welfare and promote economic growth. In particular, improvements in institutional efficiency expand the demand for transactions, which in turn increases the need for further third‐party protection of property rights. We illustrate our results using the growth of the state system in Western Europe.