Abstract
We develop a dynamic political economy model in which investment in the state capacity to levy taxes and deter crime is a policy variable, and we study the evolution of state capacity when policy is chosen by an elite. We show that democratization in the sense of expansion of the elite leads to an increased investment in state capacity and to a reduction in illegal activities and has nonmonotonic effects on tax rates as it reduces the willingness of the elite to engage in particularistic spending but enhances its willingness to provide public goods. Depending on initial conditions, consensual political changes may lead either to democratization or to the entrenchment of an immovable elite.
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This work benefitted greatly from discussions about this and related research at the 16th Symposium on Public Economics (Granada, Spain), the 2008 IASE-NBER Conference (Universidad de los Andes, Chile), and the VI Workshop on Collective Decisions (Universidad de Málaga, Spain). Socorro Puy, Alexander Galetovic, Javier Suárez Pandiello, and two anonymous referees provided comments and suggestions.
Financial support from Asociación Mexicana de Cultura is gratefully acknowledged.
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Herrera, H., Martinelli, C. Oligarchy, democracy, and state capacity. Econ Theory 52, 165–186 (2013). https://doi.org/10.1007/s00199-011-0665-z
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DOI: https://doi.org/10.1007/s00199-011-0665-z