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

by

Timothy Besley and Torsten Persson

Abstract

Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes, assumptions which cannot be taken for granted in many states, neither historcally nor in today's developing world. Our paper develops a framework where "policy choices" in market regulation and taxation are constrained by past investments in the legal and fiscal capacity of the state. We study the economic and political determinants of such investments and find that legal and fiscal capacity are typically complements. Our theoretical 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 of both forms. Our preliminary empirical results uncover a number of correlations in cross-country data which are consistent with the theory.