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Under-investment in state capacity: the role of inequality and political instability

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  • Mauricio Cárdenas
  • Didem Tuzemen

Abstract

Existing 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 Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 11-07.

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Date of creation: 2011
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Handle: RePEc:fip:fedkrw:rwp11-07

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  1. Daron Acemoglu & Davide Ticchi & Andrea Vindigni, 2006. "Emergence and Persistence of Inefficient States," NBER Working Papers 12748, National Bureau of Economic Research, Inc.
  2. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May.
  3. Eduardo Lora, 2007. "The State of State Reform in Latin America," World Bank Publications, The World Bank, number 6642, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. 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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Cited by:
  1. Arthur Silve, 2012. "Complementarity and the resource curse," PSE Working Papers halshs-00728703, HAL.
  2. Musharraf Cyan & Jorge Martinez-Vazquez & VIoleta Vulovic, 2013. "Measuring tax effort: Does the estimation approach matter and should effort be linked to expenditure goals?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1308, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Martín Ardanaz & Carlos Scartascini, 2011. "Why Don't We Tax the Rich? Inequality, Legislative Malapportionment, and Personal Income Taxation around the World," IDB Publications 65178, Inter-American Development Bank.
  4. repec:hal:wpaper:halshs-00728703 is not listed on IDEAS
  5. Cingolani, Luciana, 2013. "The State of State Capacity: a review of concepts, evidence and measures," MERIT Working Papers 053, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  6. Mauricio Cárdenas & Santiago Ramírez & Didem Tuzemen, 2011. "Commodity dependence and fiscal capacity," Research Working Paper RWP 11-08, Federal Reserve Bank of Kansas City.

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