Journal of Economic Growth

This paper quantitatively analyzes the stability and breakup of nations. The tradeoff between increasing returns in the provision of public goods and the costs of greater cultural heterogeneity mediates agents’ preferences over different geographical configurations, thus determining the likelihood of secessions and unions. After calibrating the model to Europe, we identify the regions prone to secession and the countries most likely to merge. We then estimate the implied monetary gains from EU membership. As a test of the theory, we show that the model can account for the breakup of Yugoslavia and the dynamics of its disintegration. We find that economic differences between the Yugoslav republics determined the order of disintegration, but cultural differences, though small, were key to the country’s instability. The paper also provides empirical support for the use of genetic distances as a proxy for cultural heterogeneity.

We examine the implications for growth and development of the existence of two types of human capital: entrepreneurial and professional. Entrepreneurs accumulate human capital through a work-experience intensive process, whereas professionals’ human capital accumulation is education-intensive. Moreover, the return to entrepreneurship is uncertain. We show how skill-biased technological progress leads to changes in the composition of aggregate human capital; as technology improves, individuals devote less time to the accumulation of human capital through work experience and more to the accumulation of human capital through professional training. Thus, our model explains why entrepreneurs play a relatively more important role in intermediate-income countries and professionals are relatively more abundant in richer economies. It also shows that those countries that initially have too little of either entrepreneurial or professional human capital may end up in a development trap.