Fiscal Legibility and State Development: Theory and Evidence from Colonial Mexico

Due to human error on our part, we did not record a major portion of Emily Sellars PIPE Workshop talk on fiscal legibility and state development. Apologies to those who were unable to attend the live presentation.

For your convenience, here is the full transcript, saved from the live captioning during the event. In addition, Sellars was kind enough to share her slides (see below) and the paper (also below).

Fiscal Legibility and State Development: Theory and Evidence from Colonial Mexico

We examine how fiscal legibility, the ability of a central government to observe local economic conditions for the purposes of taxation, shapes political centralization. When a ruler is unable to observe economic conditions, it can be preferable to grant autonomy to local intermediaries in charge of tax collection to encourage better performance.

As a ruler’s ability to observe local conditions improves, so does his ability to accurately monitor and sanction underperforming intermediaries. This enables the ruler to tighten control over tax collection, retain more revenue, and establish a more direct state presence. It also encourages investment in further enhancing fiscal legibility.

We present a dynamic principal-agent model to illustrate this argument and provide empirical support for the theory using subnational panel data on local political institutions in colonial Mexico around the time of a technological innovation that drastically improved the Spanish Crown’s ability to observe local economic production: the introduction of the patio process to refine silver. We show that the transition to direct rule differentially increased in mining districts following this technological innovation and that these areas saw greater investments to improve fiscal legibility over the long term.

(joint work with Francisco Garfias of UCSD)

Emily Sellars, assistant professor, Department of Political Science. Sellars’ research interests are at the intersection of comparative political economy, development economics, and economic history. Her dissertation, “Essays on Emigration and Politics,” received the 2017 Mancur Olson Award for the best dissertation in political economy defended in the previous two years.