Playing the stationary bandit: State size and the strategies of fiscal extraction

Fiscal extraction constitutes the core of state capacity, and variation in extraction strategies is critical to its manifestation. Yet previous studies have either overlooked fiscal strategy or reduced variation to narrow regime differences. Building on Olson’s stationary bandit framework, this paper develops a formal model grounded in transaction cost theory and tests its predictions using cross-national panel evidence from 1996–2021 to show that state size induces more restrained fiscal extraction strategies through rulers’ political survival constraints. Estimates based on pooled regression and fixed-effects models consistently indicate that larger states levy systematically lower levels of fiscal extraction, a finding further supported by PPML estimates showing that they convert a smaller share of their fiscal capacity into realized revenue. Mechanism tests employing the Fragile States Index reveal that, with increasing state size, the quadratic extraction-fragility relationship systematically intensifies, and the extraction threshold minimizing fragility declines significantly. This pattern confirms that rulers in larger states, as stationary bandits seeking to maximize political survival, must adopt more restrained extraction strategies. These findings highlight how state size conditions fiscal strategies and call for a more nuanced measurement of state capacity.