A collective-action theory of fiscal-military state building

Abstract

Prior to the emergence of the fiscal-military state, many monarchs depended on economic and local elites for the collection of tax revenue and defense. Why did these powerful elites allow the ruler to increase fiscal centralization and build-up militarily? Building on historical accounts of colonial Mexico and 17th century England, this chapter develops a game-theoretic analysis that explains why increases in fiscal centralization are more likely when the probability of a threat of internal unrest or external invasion increases. Elites free ride on fiscal contributions under fragmented fiscal capacity. Centralized fiscal collection and enforcement serves as an institutional devise for the elites to overcome free riding and ensure the provision of military protection. The analysis shows that an increase in the probability of a threat is more likely to result in centralization when the alignment between the elites' and the ruler's vulnerability to the threat is high, and in the presence of economic growth. The analysis also suggests that institutions that allow rulers to commit, such as representative assemblies, may not be necessary for fiscal centralization to transpire. Examples from European and colonial history provide support for the implications of the theoretical analysis.