Konrad, Kai A. and Skaperdas, Stergios
The market for protection and the origin of the state.
In: Economic Theory, Vol. 50, No. 2: pp. 417-443
We examine a stark setting in which security or protection can be provided by self-governing groups or by for-profit entrepreneurs (kings, kleptocrats, or mafia dons). Though selfgovernance is best for the population, it faces problems of long-term viability. Typically, in providing security the equilibrium market structure involves competing lords, a condition that leads to a tragedy of coercion: all the savings from the provision of collective protection are dissipated and welfare can be as low as, or even lower than, in the absence of the state.