The Paradox of Power: Principal-Agent Problems and Fiscal Capacity in Absolutist Regimes
47 Pages Posted: 13 Mar 2017 Last revised: 8 Nov 2017
Date Written: November 7, 2017
Tax extraction is often low in absolutist regimes. Why are absolutists unable to convert power into revenue? Supported by evidence from Imperial China, we explain this puzzle with a principal-agent model which reveals that absolutists, unconstrained by rule of law and unable to commit to not predating on their tax-collecting agents (and the masses), may find it optimal to settle for a low wage-low tax equilibrium, while permitting agents to keep extra, unmonitored taxes. Our analysis suggests that low investment in administrative capacity is a conscious choice for an absolutist since it substitutes for credible commitment to refrain from confiscation.
Keywords: administrative capacity, fiscal capacity, state capacity, principal-agent problem, monitoring, credible commitment, absolutism, limited government, taxation, China, Europe, Qing Empire
JEL Classification: N45, N43, H20, P48, P51
Suggested Citation: Suggested Citation