Economic Geography and its Effect on the Development of the German States from the Holy Roman Empire to the German Zollverein (Wirtschaftsgeographie und ihr Einfluss auf die Entwicklung der deutschen Staaten vom Heiligen Romischen¨ Reich bis zum Deutschen Zollverein) DISSERTATION zur Erlangung des akademischen Grades doctor rerum politicarum (Doktor der Wirtschaftswissenschaft) eingereicht an der WIRTSCHAFTSWISSENSCHAFTLICHEN FAKULTAT¨ DER HUMBOLDT-UNIVERSITAT¨ ZU BERLIN von THILO RENE´ HUNING M.SC. Pr¨asidentin der Humboldt-Universit¨at zu Berlin: Prof. Dr.-Ing. Dr. Sabine Kunst Dekan der Wirtschaftwissenschaftlichen Fakult¨at: Prof. Dr. Daniel Klapper Gutachter: 1. Prof. Dr. Nikolaus Wolf 2. Prof. Barry Eichengreen, Ph.D. Tag des Kolloqiums: 02. Mai 2018 Zusammenfassung Die vorliegende Dissertation setzt sich mit dem Einfluß okonomischer¨ Geographie auf die Geschichte des Heiligen Romischen¨ Reichs deutscher Nation bis zum Deutschen Zollverein auseinander. Die Dissertation besteht aus drei Kapiteln. Im ersten Kapitel werden die Effekte von Heterogenitat¨ in der Beobacht- barkeit der Bodenqualitat¨ auf Besteuerung und politischen Institutionen erlautert,¨ theoretisch betrachtet und empirisch anhand von Kartendaten analysiert. Es wird ein statistischer Zusammenhang zwischen Beobachtbarkeit der Bodenqualitat¨ und Große¨ und Uberlebenswahrschenlichkeit¨ von mittelalterlichen Staaten hergestelt. Das zweite Kapitel befasst sich mit dem Einfluß dieses Mechanismus auf die spezielle Geschichte Brandenburg-Preußens, und erlautert¨ die Rolle der Beobachtbarkeut der Bodenqualitat¨ auf die Entwicklung zentraler Institutionen nach dem Dreißigjahrigen¨ Krieg. Im empirischen Teil wird anhand von Daten zu Provinzkontributionen ein statistisch signifikanter Zusammenhang zwischen Bodenqualitat¨ und Besteuerug erst im Laufe des siebzehnten Jahrhundert deutlich. Das dritte Kapitel befasst sich mit dem Einfluß relativer Geographie auf die Grundung¨ des Deutschen Zollvereins als Folge des Wiener Kongresses. Durch Analyse der Handelsstrome¨ und potentieller Zolleinnahmen wird ein Zusammenhang zwischen Geographischer Lage und der Entscheidung, dem Zollverein anzugehoren¨ deutlich. Dies erklart¨ in Teilen, wie einnahmemaximierende Staaten dem Zollverein aus Eigeninteresse beitreten konnten. Summary This dissertation features three essays on the influence of Economic Geography on the development of the Holy Roman Empire until the German Zollverein. The dissertation consists of three essays. The first analyzes the effect of geographically induced heterogeneity of soil quality, which has knock on effects on the development of taxation and political institutions. These ideas are analyzed both theoretically and empirically, using a novel dataset of GIS maps. Results indicate a relationship between observability and states’ geographic sizes and survival probability. The second chapter employs these ideas in the context of Brandenburg-Prussia, striving to create a centralized state after the Thirty Years War. Empirics indicate a relationship between observability and provincial contribution during the decades following the Thirty Years War. The third chapter analyzes the influence of geography on the foundation of the German Zollverein as a consequence of the Congress of Vienna. By analyzing trade flows and potential tariff revenues, a relationship between a state’s geographic location and its decision to join the Zollverein is revealed. In parts, this explains how revenue-maximizing states could join the Zollverein, for their own interest. Contents Questioning Germany’s role in the history of the European continent always provokes the study of the roots of its development. Its past, becoming out of hundreds of independent states, it’s late unification under Prussian rule, the ubiquitous heritage of its totalitarian regimes, all these events are already enough motivation to carefully examine its past. Germany is by some both viewed as a dividing force, for many aspects held responsible for other European states’ inability to take reasonable steps to solve the recent economic crisis. To some, Germany is a unifying element on the continent, and an element of stability, and a driver of European integration. To others, it is a stronghold of democracy against the New Populism spreading in other parts of Europe and the world. Recent developments in the theoretical study of economic collaboration, the theory of incomplete contracts, and the study of the role of geography and transport for the modern economy, can not only be confronted with empirical tests but also conceptually extended in the context of German history. It is the privilege of economic history, the ‘big picture’ discipline translating between other fields of economics, to connect between theory on the individual collaborating under asymmetric information, economic geography, the development of the state, and the emergence of today’s pattern of international trade. Therefore, this dissertation contains three essays that study the development of the state in and around modern Germany. Arranged in order of historical chronology, the they thrive to connect all the above questions, to better understand the origins of states in general and the German state in particular. The first essay “Lord of the Lemons: Origins and Dynamics of State Capacity” (page ) is joint work with Fabian Wahl of University of Hohenheim and aims to explain the roots of state development in the Holy Roman Empire 1250–1789. It employs a micro-economic model of incomplete contracts to understand how small spatial variation in in the quality of geography, more concretely the soil, allowed some states to tax agricultural output efficiently, and therefore thrive in competition with other states. This paper introduces the idea of institutional competition to the theory of transparency, or observability, of agricultural output. It proposes a new geographical index to test this idea empirically, and includes a new data set on the states in the Holy Roman Empire. The model is tested using various measurements of state capacity. To further provide evidence for the role of geography for efficient taxation, the second essay “The State Built on Sandy Grounds: How Geography formed Brandenburg-Prussia” (page ) studies only one coun- try in the Holy Roman Empire at the historical turning point at which it develops its efficient state, just after the Thirty Years War (1618–1648). In its attempt to link historical literature on Brandenburg-Prussia and incomplete contract theory, it analyzes the chronology of administrative reforms undertaken by the Hohenzollern rulers to efficiently tax its provinces outside of Brandenburg, overcoming the resistance of local elites. The paper argues that these administrative reforms were made possible by an advantageous geography of the Brandenburg soil. During the second half of the 17th century, the Hohenzollern adminis- tration learned how to export this advantage to its other regions, most importantly to its territories in the West of today’s Germany. The combination of the Brandenburg-Prussian’s ability to integrate their territories at the Rhine and historic circumstances allowed them to lead the economic integration of Germany, via the first customs union in history, the German Zollverein. To make this point, the third essay “How Britain Unified Germany: Endogenous Geography and the Formation of a Customs Union” (page ), which is joint with Nikolaus Wolf, offers a theory on the role of geography for the foundation of a customs union. This theory assumes that state rulers, at the foundation period after the Congress of Vienna, were revenue (not welfare) maximizing, and were dependent on transit tariffs for their state households. State rulers take into consideration their relative geographic size and position and compare it to the relative size and position of a customs union they could potentially join. As such, this paper introduces the problem of multiple marginalization into the literature on customs unions, and understands state collaboration as a mechanism to collect tariff revenue more efficiently. This model is then calibrated and tested using a simulation approach. This tests whether the sequence in which key states joined the customs union can be explained by revenue maximization. A counterfactual reveals that Prussia’s control over the Rhine was a sine qua non condition for the formation of the German Zollverein under Berlin’s rule, the economic predecessor of the German political unification. Berlin, in December 2017 1 Origins of State Capacity Lord of the Lemons: Origins and Dynamics∗ of State Capacity † ‡ Thilo R. Huning and Fabian Wahl Abstract To better understand the role of taxation in the emergence of states, this article presents an incomplete contract model of an agricultural society in which information asymmetries cause inefficient taxation, and hence outmigration, uprisings, and rent-seeking, but also urbanization. We propose a geographic index of information costs, observability, to test our model. Our case study is the Holy Roman Empire, which had a relatively homogeneous institutional framework, state of technology, culture, and ethnic composition across hundreds of observed states, for over 500 years. We find a robust link between observability and states’ tax capacity, their size, and their survival. JEL Codes: D02 · D82 · H11 · H21 · N93 Keywords: State capacity · principal-agent problem · taxation · Holy Roman Empire ∗ We would like to thank Sibylle Lehmann-Hasemeyer, Nikolaus Wolf, and Barry