Working Papers in Trade and Development From Revenues to Democracy?

This paper contributes to the historical political economy literature, which considers the fiscal imperatives of the state to be amongst the driving forces behind the emergence of representative systems of government, by examining the impact on democracy of a government’s reliance on alternative sources of revenue. ‘Taxation’ and ‘natural resource rent extraction’ are considered as alternative sources of revenue within a unified framework. I develop a simple game-theoretic model which postulates that an increase in tax revenues, or a decrease in natural resource rents, enhances democracy. The predictions of the model are empirically tested using a cross-national panel dataset, covering 132 countries over the time period 1990-2009. The evidence is in line with the theoretical model. JEL Codes: B5, C1, C7, H2, O1