The Origins of the State's Institutional Capacity

Abstract

We develop and test a theory of the state's institutional capacity, which is the elites' ability to garner the non-elites' cooperation in joint investments via public good provision. Notably, the elites can entice the non-elites by enacting either an inclusive political process, which grants them the power to select the tax rate and their preferred public good, or an inclusive fiscal regime, which prescribes that compromise fiscal policies are chosen. Both a smaller investment return and a larger non-elites' outside option make it more necessary to embrace inclusive institutions to support cooperation. These predictions are consistent, across identification strategies, with the negative links between measures of the inclusiveness of the political process and the degree of non-elites' control over fiscal policies and proxies for both long-distance trade potential and the strength of the non-elites' culture of cooperation in a panel of 90 European historical regions spanning the 1000-1600 period.