The Simple Analytics of Elite Behavior under Limited State Capacity ∗

This paper discusses the issue of taxation and redistribution in economies dominated by Elites with limited state capacity. Within a simple aggregate framework, we discuss the political economy incentives of Elites to tax, redistribute and increase state capacity. In particular, the analysis highlights the role of complementarities or substitutability in the production process between the factors controlled by the Elite and other social groups and shows the existence of natural increasing returns for Elites to increase state capacity. The paper also discusses how the incentives for state capacity building are affected by political threats of power shifting.