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Serving two masters: The effect of state religion on fiscal capacity

Adam, Antonis and Tsarsitalidou, Sofia (2019): Serving two masters: The effect of state religion on fiscal capacity.

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Abstract

In this paper, we examine the effect of having a state religion on fiscal capacity. Our analysis extends the legitimization argument, which postulates that state religion legitimizes the revenue-raising motives of the state. We estimate (i) a simple OLS model, and (ii) potential outcome models, to model the selection to observables, using both recent and historical data. Our empirical results suggest that countries with a state religion have lower levels of fiscal capacity. We then build a simple theoretical model, consistent with our empirical results, and show that countries with a state religion face lower incentives to invest in fiscal capacity as they are able to raise revenue through the legitimizing power of the church.

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