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

  • Timothy Besley
  • Torsten Persson

Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes. This paper develops a framework where "policy choices" in market regulation and taxation are constrained by past investments in legal and fiscal capacity. It studies the economic and political determinants of such investments, demonstrating that legal and fiscal capacity are typically complements. The results show that, among other things, common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Some correlations in cross-country data are consistent with the theory. (JEL D72, E62, H11, H20, P14)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.99.4.1218
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File URL: http://www.aeaweb.org/aer/data/sept09/20071354_data.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 4 (September)
Pages: 1218-44

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:4:p:1218-44
Note: DOI: 10.1257/aer.99.4.1218
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  19. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
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  23. Alberto Alesina & Reza Baqir & William Easterly, 1999. "Public Goods and Ethnic Divisions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1243-1284.
  24. Schultz, Kenneth A. & Weingast, Barry R., 2003. "The Democratic Advantage: Institutional Foundations of Financial Power in International Competition," International Organization, Cambridge University Press, vol. 57(01), pages 3-42, December.
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