The Rise of Fiscal Capacity Davide Cantoni Cathrin Mohr Matthias Weigand* June 2021 Abstract We study the role of a crucial institutional innovation — the development of fiscal capacity through modern, permanent administrations — in fostering state consolidation in Europe in the Early Modern era. Using a novel dataset, we examine the introduction of fiscal centraliza- tion in territories of the Holy Roman Empire from 1400 to 1789. After implementing the reform, territories were more likely to survive, increased in size, and were able to achieve a more com- pact territorial extension. We show that increased revenues, a reduction of short-term lending, more investments in military infrastructure, improved defensive capability, and a higher abil- ity to marry off daughters to powerful princes, were key mechanisms through which rulers were able to consolidate their territories. The absence of pre-trends, as well as the robustness of our results with regard to selection and endogeneity concerns, suggest that fiscal centralization played a causal role in this context. We argue that the external threat posed by the Ottoman Empire was a key driver of the adoption of fiscal centralization, independently of the rise and decline of deliberative bodies (Estates). Keywords: Fiscal capacity, state competition, war, Germany JEL Classification: H20, N33, N43, P16 *Cantoni: Ludwig-Maximilians-Universitat¨ Munich, CEPR, and CESifo. Email:
[email protected]. Mohr: Univer- sitat¨ Bonn. Email:
[email protected]. Weigand: Harvard University. Email:
[email protected]. Helpful and much appreciated suggestions, critiques and encouragement were provided by Joachim Voth and Jesse Shapiro as well as seminar and conference participants in Berkeley, Frankfurt (Max Planck Institute), Harvard, Milan (Universita` Cattolica), Oxford, and Tel Aviv.