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American Economic Review: Vol. 99 No. 4 (September 2009)

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

Article Citation

Besley, Timothy, and Torsten Persson. 2009. "The Origins of State Capacity: Property Rights, Taxation, and Politics." American Economic Review, 99(4): 1218-44.

DOI: 10.1257/aer.99.4.1218

Abstract

Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes. This paper develops a framework where "policy choices" in market regulation and taxation are constrained by past investments in legal and fiscal capacity. It studies the economic and political determinants of such investments, demonstrating that legal and fiscal capacity are typically complements. The 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. Some correlations in cross-country data are consistent with the theory. (JEL D72, E62, H11, H20, P14)

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Authors

Besley, Timothy (London School of Economics and CIFAR)
Persson, Torsten (Institute for International Economic Studies, Stockholm U and CIFAR)

JEL Classifications

D72: Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
E62: Fiscal Policy
H11: Structure, Scope, and Performance of Government
H20: Taxation, Subsidies, and Revenue: General
P14: Capitalist Systems: Property Rights


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