Working Paper: CEPR ID: DP18377
Authors: Jean Lacroix; Kris Mitchener; Kim Oosterlinck
Abstract: We analyze how secession movements unfold and the interdependence of regions’ decisions to secede. We first model and then empirically examine how secessions can occur sequentially because the costs of secession decrease with the number of seceders and because regions update their decisions based on whether other regions decide to secede. We verify the existence of these “domino secessions” using the canonical case of the secession of southern U.S. states in the 1860s. We establish that financial markets priced in the costs of secession to geographically-specific assets (state bonds) after Lincoln’s election in the fall of 1860 – long before war broke out. We then show that state bond yields reflect the decreasing costs of secession in two ways. First, as the number of states seceding increased, yields on the bonds of states that had already seceded fell. Second, seceding states with more heterogeneous voters had higher risk premia, reflecting investors beliefs that further sub-secession was more likely in these locations.
Keywords: Secession; Interdependence; Uncertainty
JEL Codes: H77; N21; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of seceding regions (H77) | likelihood of other regions to secede (H77) |
| number of seceding regions (H77) | costs of secession (H77) |
| number of seceding regions (H77) | bond yields of previously seceded states (H74) |
| local political sentiments (H73) | bond yields (G12) |