Working Paper: NBER ID: w11397
Authors: John Joseph Wallis; Barry R. Weingast
Abstract: Why did states dominate investments in economic development in early America? Between 1787 and 1860, the national government's $54 million on promoting transportation infrastructure while the states spent $450 million. Using models of legislative choice, we show that Congress could not finance projects that provided benefits to a minority of districts while spreading the taxes over all. Although states faced the same political problems, they used benefit taxation schemes -- for example, by assessing property taxes on the basis of the expected increase in value due to an infrastructure investment. The U.S. Constitution prohibited the federal government from using benefit taxation. Moreover, the federal government's expenditures were concentrated in collections small projects -- such as lighthouses and rivers and harbors -- that spent money in all districts. Federal inaction was the result of the equilibrium political forces in Congress, and hence an equilibrium impotence.
Keywords: Economic Development; Infrastructure; Political Economy; Federalism; Benefit Taxation
JEL Codes: N0; N4; N7; H1; H2; H5; H7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political constraints of majority rule (D72) | Federal government's political impotence in financing large infrastructure projects (H54) |
| Exit constraint (D10) | Preference for universalism in federal policies (H53) |
| Constitutional prohibition on benefit taxation + Logic of congressional politics (H20) | Federal impotence regarding large infrastructure projects (H54) |
| Benefit taxation by states (H20) | Ability to finance large infrastructure projects (H54) |
| Benefit taxation (H20) | Addressing political problems that plagued the federal government (D72) |
| Federal government's inability to finance large projects (H54) | Smaller, universal projects (D39) |
| States' ability to use benefit taxation (H20) | Different pattern of investment between state and federal governments (H54) |