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American Economic Journal: Macroeconomics: Vol. 5 No. 4 (October 2013)

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Weak States and Steady States: The Dynamics of Fiscal Capacity

Article Citation

Besley, Timothy, Ethan Ilzetzki, and Torsten Persson. 2013. "Weak States and Steady States: The Dynamics of Fiscal Capacity." American Economic Journal: Macroeconomics, 5(4): 205-35.

DOI: 10.1257/mac.5.4.205

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 the evolution of fiscal capacity over time. We contrast a social planner's investment path with politically feasible paths. Three types of states emerge in the long run: a common-interest state where public resources are devoted to public goods, a redistributive state where additional fiscal capacity is used for transfers, and a weak state with no transfers and a low level of public goods provision. We also present some preliminary evidence consistent with the theory.

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Authors

Besley, Timothy (London School of Economics and Political Science)
Ilzetzki, Ethan (London School of Economics and Political Science)
Persson, Torsten (Stockholm U)

JEL Classifications

E23: Macroeconomics: Production
E62: Fiscal Policy
H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H26: Tax Evasion
H41: Public Goods

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