Economic Foundations of the Territorial State System

The contemporary world is organized into a system of territorial states in which rulers exercise authority inside clearly dened boundaries and recognize the authority of other rulers outside those boundaries. We develop a model to explain how the major economic and military developments in Europe starting in the 15th century contributed to the development of this system. Our model rationalizes the system as an economic cartel in which self-interested and forward-looking rulers maintain high tax revenues by reducing competition in the market for governance.