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

Economists generally assume that the state has sufffcient institutional capacityto support markets and levy taxes, assumptions which cannot be taken forgranted in many states, neither historcally nor in today’s developing world.Our paper develops a framework where "policy choices" in market regulationand taxation are constrained by past investments in the legal and fiscalcapacity of the state. We study the economic and political determinants ofsuch investments and find that legal and fiscal capacity are typically complements.Our theoretical results show that, among other things, common interestpublic goods, such as fighting external wars, as well as political stability andinclusive political institutions, are conducive to building state capacity of bothforms. Our preliminary empirical results uncover a number of correlations incross-country data which are consistent with the theory.[...]