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.
Besley, Timothy, Ethan Ilzetzki, and Torsten Persson.
"Weak States and Steady States: The Dynamics of Fiscal Capacity."
American Economic Journal: Macroeconomics,
Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies