Working Paper: NBER ID: w13028
Authors: Timothy 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; property rights; taxation; politics; economic institutions
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 |
|---|---|
| historical experiences of war (N44) | state capacity (H11) |
| inclusive political institutions (D72) | state capacity (H11) |
| wealth levels (D31) | state capacity (H11) |