Freedom Through Taxation: The Effect of Fiscal Capacity on the Rule of Law

28 Pages Posted: 6 Aug 2022

See all articles by Ryan H. Murphy

Ryan H. Murphy

affiliation not provided to SSRN

Colin O'Reilly

Creighton University

Abstract

This paper explores the effects of fiscal capacity on the rule of law. Following the Besley and Persson (2009) model exploring complementarities between fiscal capacity and legal capacity, we test the relationship using fiscal capacity and rule of law data from the Varieties of Democracy dataset. We leverage the lengthy time-series found in the dataset by employing the dynamic common correlated effects (DCCE) estimator to supplement standard panel methods. Unlike the widely used fixed effects method, DCCE method adjusts for the presence of econometric issues including cross-sectional dependence, heterogeneous slopes, and unobservable common factors that plague the error-structure in panel data. Consistent with Olson’s model of the stationary bandit and Besley and Persson (2009), we conclude that innovations in fiscal capacity have positive, non-trivial effects on the rule of law.

Keywords: Fiscal Capacity, Legal Capacity, Rule of Law, Institutional Development, State Capacity, Stationary Bandit

Suggested Citation

Murphy, Ryan H. and O'Reilly, Colin, Freedom Through Taxation: The Effect of Fiscal Capacity on the Rule of Law. Available at SSRN: https://ssrn.com/abstract=4183279

Ryan H. Murphy

affiliation not provided to SSRN ( email )

No Address Available

Colin O'Reilly (Contact Author)

Creighton University ( email )

2500 California St.
Omaha, NE 68178
United States

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