I think you make an interesting point, but allow me a bit of push back. The world government would set the rules of how federated entities would interact. This would be like standards and protocols. You are correct that a set of shared standards can allow for enhanced competition, of the good variety (what I call constructive competition). This would be a good thing.

However the same shared standards would lock in the world to one set of protocols, thus reducing the discovery via variation and selection of the shared institutions themselves.

Thus we would see more short range constructive competition between states, and less long term exploration of new and potentially better institutional standards.

This is from Rojelio. He is pushing back against my argument in favor of world government from a libertarian point of view. He’s right, of course. There’s two points I need to do a better job of clarifying when I advocate for world government from a libertarian point of view:

1. I don’t think federating the entire world is a good idea. I think the piecemeal federation of political units is what libertarians ought to aim for. (I think the US interstate order is the best avenue for achieving this aim.) A healthy “world federation” would govern (say) 85% of the world’s population. This brings me to my second point I need to clarify.
2. The importance of exit needs to be addressed and institutionalized in a proper federal order. This is difficult to do, but not impossible. My argument is to make exit difficult, but not too difficult. The difficulty of exit should be somewhere on the scale between a constitutional amendment (too difficult) in the US order and Brexit (too easy) in the Westphalian order.

The bottom line is that a more libertarian world will likely be composed of a large federal polity that protects the freedoms of the vast majority of its citizens better than most nation-states do today. The other 15% of the world would live under despotism (which will center around “cultural cores”), or under sparsely-populated democratic republics (i.e Australia), or within free-riding microstates that otherwise rely on the protection of the large federal unit.

If, say, England, Tamaulipas, and Duyên hải Nam Trung Bộ were to federate with the United States tomorrow, these polities would not be agitating for exit after 10 years of experimentation in self-governance. If, say, Texas or Vermont wanted to exit after 10 years of federation with those 3 polities, they would have to go through a process (via all of the legislative branches involved) to do so. A simple majority vote would be disastrous. It is unlikely, then, that Texas or Vermont would leave such a federation. Pure freedom would be unrealized, but billions of people would be much freer.