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The Origins of State Capacity: Property Rights, Taxation, and Politics

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Timothy Besley
Torsten Persson

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13028.

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Date of creation: Apr 2007
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Handle: RePEc:nbr:nberwo:13028

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Find related papers by JEL classification:
D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
H10 - Public Economics - - Structure and Scope of Government - - - General
K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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  1. Thomas Gall & Paolo Masella, 2007. "A Tale of Markets and Jungles in a Simple Model of Growth," JEPS Working Papers 07-004, JEPS. [Downloadable!]
  2. Giuliano, Paola & Mishra, Prachi & Spilimbergo, Antonio, 2009. "Democracy and Reforms," CEPR Discussion Papers 7194, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Sergei Guriev & Konstantin Sonin, 2007. "Dictators and Oligarchs: A Dynamic Theory of Contested Property Rights," Working Papers w0116, Center for Economic and Financial Research (CEFIR). [Downloadable!]
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