Timothy Besley (joint with Torsten Persson): 'The Origins of State Capacity: Property Rights, Taxation and Politics', forthcoming in AER

A paper by Timothy Besley (joint with Torsten Persson) The Origins of State Capacity: Property Rights, Taxation and Politics is forthcoming in the American Economic Review.

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 historically nor in today's developing world. In this paper the authors develop a framework where "policy choices" in market regulation and taxation are constrained by past investments in the legal and fiscal capacity of the state. They study the economic and political determinants of such investments and find that legal and fiscal capacity are typically complements. Their 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. Their preliminary empirical results uncover a number of correlations in cross-country data which are consistent with the theory.