Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: A burgeoning literature recognizes 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 how it is provided and maintained. 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 differ in policy preferences and public goods valuations. We embed this structure in a simple political economy framework, where politicians may idle parts of the state depending on electoral prospects, thus reducing output. In conjunction with high partisanship, this gives the state designer incentives to distort the state away from efficient levels of capacity and specialization.