The Market for Protection and the Origin of the State

We examine a stark setting in which security or protection can be provided by self-governing groups of by for-profit entrepreneurs: kings, lords, or mafia dons. Though self-governance is best for the population, it faces problems of long-term viability. Typically, in providing security the stable 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 or lower than in the absence of a state.