Size and dynastic decline: The principal-agent problem in late imperial China, 1700-1850

•I model the principal-agent problem in a large dictatorship.•Severe agency problems lead to high corruption and low taxation.•Economic expansion could aggravate corruption and fiscal weaknesses.•I show that the Chinese state taxed and administered sparingly.•Furthermore, China's fiscal capacity contracted steadily during the 18th century.

This paper argues that China's size was one reason behind its relative decline in the nineteenth century. A ruler governing a large country faces severe agency problems. Given his monitoring difficulties, his agents have strong incentives to extort the taxpayers. This forces him to keep taxes low to prevent revolts. Economic expansion could aggravate corruption and cause further fiscal weakening. To support the model's predictions, I show that the Chinese state taxed and administered sparingly, especially in regions far from Beijing. Furthermore, its fiscal capacity contracted steadily during the prosperous eighteenth century, sowing the seeds for the nineteenth-century crises.