A burgeoning literature recognises that the efficacy of the state is crucial for economic growth and citizen welfare. However, much of that literature abstracts away from the institutional details underlying state capacity. We develop a theory that provides a working definition of state capacity—the ability to handle administrative problems of varying complexity, such as tax collection—and examines how different incentives and structures affect that capacity. We conceive of the state as a knowledge hierarchy, or an information-processing institution that passes problems up a set of organizational layers until a layer with the required expertise solves it.
Knowledge hierarchies are costly to establish and operate, and politicians have different preferences over which problems to solve. We embed investments in the state in a simple political economy framework, where in each period a forward-looking politician representing one of two parties chooses how to build upon existing institutions. The framework identifies the role of personnel costs, organizational costs, electoral imbalances, and partisanship on the extent and distribution of problems solved by the state.
Co-author: Michael M. Ting, Columbia University.