DP13968 State Capacity, Reciprocity, and the Social Contract
This paper explores the role of civic culture in expanding fiscal capacity by developing a model based on reciprocal obligations; citizens pay their taxes and the state provides public goods. Civic culture evolves over time according to the relative payoff of civic-minded and materialist citizens. A strong civic culture manifests itself as high tax revenues sustained by high levels of voluntary tax compliance and provision of public goods. This captures the idea of government as a reciprocal social contract between the state and its citizens. The paper highlights the role of political institutions and common interests in the emergence civic culture.