Under-investment in state capacity: the role of inequality and political instability
AbstractExisting studies have shown that the state's ability to tax, also known as fiscal capacity, is positively related to economic development. In this paper, we analyze the determinants of the government's decision to invest in state capacity, which involves a trade-off between present consumption and the ability to collect more taxes in the future. Using a model, we highlight some political and economic dimensions of this decision and conclude that political stability, democracy, income inequality, as well as the valuation of public goods relative to private goods, are important variables to consider. We then test the main predictions of the model using cross-country data and find that state capacity is higher in more stable and equal societies, both in economic and political terms, and in countries where the chances of fighting an external war are high, which is a proxy for the value of public goods.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 11-07.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-LTV-2012-02-01 (Unemployment, Inequality & Poverty)
- NEP-PBE-2012-02-01 (Public Economics)
- NEP-POL-2012-02-01 (Positive Political Economics)
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- Under-investment in state capacity: the role of inequality and political instability
by Maximo Rossi in Wikiprogress América Latina on 2012-02-02 12:59:00
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