Endogenous choices: Local tax rates, state capacity, and the decision to fight
Studies on civil conflict usually assume that state capacity is exogenous to fighting. However, the local level of state capacity and the onset of fighting are both strategic decisions and likely to be interdependent. We argue that the state imposes optimal tax rates across its territory to prevent groups outside of the government from challenging the state. We assume that peace-inducing tax rates are dependent on the varying local administrative and coercive power across a state's territory. Successful taxation of some localities broadens the state's ability to increase tax demands in other localities. As the state becomes stronger by taxing supportive localities, localities sympathetic to potential challengers of the state seek to preempt increasing demands, which leads to fighting. We test the empirical implications of our formal model by implementing a Seemingly Unrelated Regression approach to locally disaggregated data, supporting our claim that tax rate rate increases and fighting are strategic complements.