Fiscally Innovating Too Soon? Divergent State Building in Medieval Italy

Abstract

Fiscal innovation and warfare are said to improve state building, but prior to the 15th century they did the opposite: fiscal states deteriorated while non-fiscal states strengthened over time. Why was there a divergence between fiscal and non-fiscal states (especially in conflict) and why did this process reverse around the 15th century? This paper argues that, prior to early commercial trade, fiscal states lacked taxable surplus to adequately fund themselves. In contrast, less developed polities used tributary strategies like giving land rewards to soldiers, which allowed them to effectively integrate soldiers during warfare. This paper leverages changes in territorial control of Italy by the Byzantine Empire and Lombard Kingdom between the 6th to 8th centuries using difference-in-differences (DID) and instrumental variable regressions. These processes can help explain why non-fiscal states initially surpassed the capacity of fiscal states and offers clues as to why this process might have reversed later.

Keywords: state building, growth, war, institutions, taxation

JEL Classification: C26, N43, N40, H2, N13