Working Paper: CEPR ID: DP6370
Authors: Timothy J. Besley; Torsten Persson
Abstract: Economists generally assume the existence of sufficient institutions to sustain a market economy and tax the citizens. However, this starting point cannot easily be taken for granted in many states, neither in history nor in the developing world of today. This paper develops a framework where "policy choices", regulation of markets and tax rates, are constrained by "economic institutions", which in turn reflect past investments in legal and fiscal state capacity. We study the economic and political determinants of these investments. The analysis shows that common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Preliminary empirical evidence based on cross-country data find a number of correlations consistent with the theory.
Keywords: state capacity; development; property rights
JEL Codes: D70; E60; H10; K40; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common interest public goods, such as fighting external wars (H40) | state capacity (H11) |
| higher taxation (H29) | financial development (O16) |
| higher taxation (H29) | income per capita (D31) |
| political stability (P26) | investments in state capacity (H54) |
| inclusive political institutions (D72) | investments in state capacity (H54) |
| expected demand for public goods (H49) | investments in state capacity (H54) |
| political turnover (J63) | investments in state capacity (H54) |
| distribution of economic power (D39) | investments in state capacity (H54) |
| more unequal income distribution (D31) | investments in legal capacity (E22) |
| more unequal income distribution (D31) | investments in fiscal capacity (H54) |