Federations, coalitions, and risk diversification

We investigate the optimal size of a nation in the context of a portfolio choice model under uncertainty. With an equal sharing rule, we characterize the equilibrium coalition structure, which is shown to depend on income, risks, and market correlations. Specifically, coalitions are likely to form among regions with similar variance in income and among regions with negative market correlations. The conditions that yield a grand coalition, two sub-coalitions of different sizes, and singletons are derived. Moreover, the equilibrium coalition structures are also examined when geographical contiguity is required.     

The creation of multi-ethnic nations with or without a?core region

What holds a multi-ethnic nation together? To answer this question, we take region as the unit of analysis and focus on factors such as the size of a region, its geographical location, and its external factors. A large region or a ??core state?? can enhance a coalition by providing more public goods, but it can also deter a coalition from forming by discouraging the existing members from accepting new members. When the net impact is positive, the large region acts like Huntington??s ??core state,?? i.e., it helps to sustain the coalition. External effects induce coalition formation when the externality is negative, while positive externality discourages formation by encouraging free-riding.