The creation of effective states in the OECD since 1870: The role of inequality

Research shows that state capacity is crucial for economic development, yet the impact of inequality on state capacity is not well understood. This paper examines the impact of income inequality on three key dimensions of state capacity, namely legal, fiscal and collective capacity using annual data for a core of 21 OECD countries over the period 1870-2013. We find that the marked reduction in inequality over most of the last century starting from 1916 was pivotal to the significant improvements in legal, fiscal and collective capacity in the OECD countries over the same period.