This essay explores the distinction between federations and alliances and asks the question: When will states choose to federate rather than ally? William Riker (1964) argues that a necessary condition for a federal state's formation is that those offering the federal bargain must seek to "expand their territorial control, usually either to meet an external military or diplomatic threat or to prepare for military or diplomatic aggression and aggrandizement." This argument, though, fails to ask why states sometimes respond to threats by forming federations and at other times by forming alliances. Here, after assuming that states have initial endowments of military and economic resources, where economic resources enter utility functions directly and a.re what states maximize and where military capability influences preference only insofar as it determines a state's ability to counter threats, we offer a. multi-stage game-theoretic model in which states may be compelled to divert economic resources to military spending. Alliances, in turn, are self-enforcing coalitions designed to augment a state's offensive or defensive capabilities. Federations, which serve the same ends as alliances, a.re coalitions that need to be enforced by the "higher authority" established when the federation is formed. Our operating assumption is that states seek to form a. federation in lieu of an alliance if and only if (1) a stable alliance partition does not exist or, if one exists, it is dominated by an unstable partition and (2) if the cost of the loss of sovereignty to each state in the federation is offset by the gains from joining it, relative to what that state secures as its security value
