Political geography and income inequalities

• We analyze political geography and the size of governments in the presence of income inequality.
• Income inequality is neutral on the size of countries but reduces the optimal provision of public goods.
• Politico-economic equilibrium geography may not exist in case of high income inequality.
• The degree of openness of countries can be negatively affected by an increase of income inequality.

We analyze political geography and the size of governments in the presence of income inequality. The social planner solution implies that income inequality is neutral on the size of countries but reduces the optimal provision of public goods within each country. Under additional conditions, a politico-economic equilibrium geography is characterized by suboptimal size of nations, but there may not be a stable equilibrium when inequality is high enough. Finally, we introduce globalization showing that inequality can increase the size of countries, reduce public good provision and, at the same time, decrease their degree of openness.