Wars and State Capacity

The article builds a simple model to investigate how different types of armed conflict shape fiscal capacity: the state's ability to raise revenue from taxes. It starts from the simple observation that external war tends to generate common interests across groups in society, whereas internal, civil war entails deep conflicting interests across groups. Our model predicts that--compared to a society without conflict--civil wars lead to smaller investments in fiscal capacity, whereas prospects of external war generally lead to larger investments. Correlations in international data on conflicts and taxation are, by and large, consistent with these predictions. (JEL: H10, N40, O10) (c) 2008 by the European Economic Association.