Public goods in trade: on the formation of markets and jurisdictions*

Must the integration of markets be accompanied by the harmonization of societies' institutions? To address this question we construct a model of heterogenous traders where the return from private exchange is directly affected by the public good individuals have access to. Trade takes place in the market, whereas the public good is chosen and financed by the jurisdiction, and each individual chooses which market and which jurisdiction to join among the many that form in equilibrium. Although trade between members of different jurisdictions entails transaction costs, we find that market integration is neither necessary nor sufficient for the integration of jurisdictions: only at intermediate market sizes must trading partners belong to a single jurisdiction. When markets are small multiple jurisdictions can exist, although a single one would be preferable; when markets are large multiple jurisdictions are both possible and desirable.