Informational Boundaries of the State

Thiemo Fetzer, Callum Shaw and Jacob Edenhofer

No 18773, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Formal conceptions of state capacity have mostly focused on indirect measures of state capacity – by, for instance, using the state's fiscal or extractive capacity as a proxy for its overall capacity. Yet, this input or extractive view of state capacity falls short, especially since cross-country empirical evidence suggests that similar levels of fiscal capacity, measured by tax revenues as a percentage of GDP, can produce starkly different outputs – both in classic economic terms and in broader terms that citizens would recognize as desirable outcomes, including quality of life, health, security, equality of opportunity, and inter-generational mobility. This paper argues that a central step towards addressing these shortcomings of the conventional view is to account for a crucial and largely ignored boundary of the state or dimension of state capacity: its capacity to gather, process, and deploy information in its conduct of fiscal policy. Specifically, we study how the presence or lack of such informational capacity constrains governments in responding to crises, such as the recent energy price shock. Our framework provides the analytical toolkit to examine how the informational boundary of the state shapes the incentives for policymakers to resort to untargeted and/or distortionary policy instruments, as opposed to targeted and non-distortionary ones, in responding to crises. The policy response to the energy crisis following the invasion of Ukraine provides the empirical context upon which we bring this theoretical framework to bear on data, though the latter can be straightforwardly extended to other recent crises.

JEL-codes: C21 C55 D63 D73 H11 O43 P16 Q48 (search for similar items in EconPapers)
Date: 2024-01
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Related works:
Working Paper: Informational Boundaries of the State (2024)
Working Paper: Informational Boundaries of the State (2024)
Working Paper: Informational Boundaries of the State (2024)
Working Paper: Informational Boundaries of the State (2024)
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