IDEAS home Printed from https://ideas.repec.org/p/fip/fedkrw/rwp11-07.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Mauricio Cárdenas & Didem Tuzemen, 2011. "Under-investment in state capacity: the role of inequality and political instability," Research Working Paper RWP 11-07, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp11-07
    as

    Download full text from publisher

    File URL: http://www.kansascityfed.org/publicat/reswkpap/pdf/rwp11-07.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
    2. 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.
    3. Arturo Galindo & Carlos Scartascini & J. Mark Payne & Robert Daughters & Alberto Melo & Koldo Echebarría & Eduardo Lora & Gabriel Filc & Alejandro Micco & Alberto E. Chong & Ugo Panizza & Juan Benavid, 2007. "The State of State Reform in Latin America," IDB Publications (Books), Inter-American Development Bank, number 59578 edited by Eduardo Lora, February.
    4. Karl R. de Rouen JR & David Sobek, 2004. "The Dynamics of Civil War Duration and Outcome," Journal of Peace Research, Peace Research Institute Oslo, vol. 41(3), pages 303-320, May.
    5. Daron Acemoglu & Davide Ticchi & Andrea Vindigni, 2011. "Emergence And Persistence Of Inefficient States," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 177-208, April.
    6. Arturo Galindo & Carlos Scartascini & J. Mark Payne & Robert Daughters & Alberto Melo & Koldo Echebarría & Eduardo Lora & Gabriel Filc & Alejandro Micco & Alberto E. Chong & Ugo Panizza & Juan Benavid, 2007. "The State of State Reform in Latin America," IDB Publications (Books), Inter-American Development Bank, number 352 edited by Eduardo Lora, April.
    7. Acemoglu,Daron & Robinson,James A., 2009. "Economic Origins of Dictatorship and Democracy," Cambridge Books, Cambridge University Press, number 9780521671422, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    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 18:59:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bird, Richard M. & Zolt, Eric M., 2011. "Dual Income Taxation: A Promising Path to Tax Reform for Developing Countries," World Development, Elsevier, vol. 39(10), pages 1691-1703.
    2. Arthur Silve, 2012. "Complementarity and the resource curse," PSE Working Papers halshs-00728703, HAL.
    3. Arthur Silve, 2012. "Complementarity and the resource curse," Working Papers halshs-00728703, HAL.
    4. 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.
    5. Mauricio Cárdenas & Santiago Ramírez & Didem Tuzemen, 2011. "Commodity dependence and fiscal capacity," Research Working Paper RWP 11-08, Federal Reserve Bank of Kansas City.
    6. Cingolani L, 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).
    7. Musharraf Rasool Cyan & Jorge Martinez-Vazquez & Violeta Vulovic, 2014. "New approaches to measuring tax effort," Chapters,in: Taxation and Development: The Weakest Link?, chapter 2, pages 27-68 Edward Elgar Publishing.
    8. Martin Ardanaz & Carlos Scartascini, 2011. "Why Don’t We Tax the Rich? Inequality, Legislative Malapportionment, and Personal Income Taxation around the World," Research Department Publications 4724, Inter-American Development Bank, Research Department.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedkrw:rwp11-07. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lu Dayrit). General contact details of provider: http://edirc.repec.org/data/frbkcus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.