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Lord of the lemons: Origin and dynamics of state capacity

Thilo R. Huning and Fabian Wahl ()

No 22-2017, Hohenheim Discussion Papers in Business, Economics and Social Sciences from University of Hohenheim, Faculty of Business, Economics and Social Sciences

Abstract: To better understand the role of taxation in the emergence of states, this article presents an incomplete contract model of an agricultural society in which information asymmetries cause inefficient taxation, and hence outmigration, uprisings, and rent-seeking, but also urbanization. We propose a geographic index of information costs, observability, to test our model. Our case study is the Holy Roman Empire, which had a relatively homogeneous institutional framework, state of technology, culture, and ethnic composition across hundreds of observed states, for over 500 years. We find a robust link between observability and states' tax capacity, their size, and their survival.

Keywords: state capacity; principal-agent problem; taxation; Holy Roman Empire (search for similar items in EconPapers)
JEL-codes: O42 D73 Q15 N93 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-his
Date: 2017
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