Weak states and steady states: The dynamics of fiscal capacity

by

Timothy Besley, Ethan Ilzetzki and Torsten Persson

Abstract

Investments in fiscal capacity -- economic institutions for tax compliance -- are an important feature of economic development. This paper develops a dynamic model to study such investments and their evolution over time. We contrast a social planner's investment path with paths where political constraints are important. Three types of states emerge in the long run: (1) a common-interest state where public resources are devoted to public goods, (2) a redistributive state where additional fiscal capacity is used for transfers, and (3) a weak state with no transfers and a low level of public goods provision. The paper characterizes the conditions for each type of state to emerge and the comparative statics within each regime. It also presents some preliminary evidence consistent with the theory.