| This dissertation empirically examines economic exchange in the absence of the state. While economic analysis focuses traditionally on economic exchange within a state able to enforce property rights, functioning states are an anomalous environment in the development process. However, a fundamental problem is that in the absence of a functioning state, there is no data collection capacity. In order to observe economic exchange in the absence of a state, I focus on a collapsed state in the current period: the Democratic Republic of the Congo (DRC). As a foundation for this dissertation, I conducted fieldwork in areas of the Eastern provinces of the Democratic Republic of the Congo that are removed from the central state.;In Chapter 1, I focus on the following question: why do states arise, and when do they fail to arise? In this chapter, I provide the first econometric evidence on the determinants of state formation at their early stages. As a foundation for this chapter, I conducted fieldwork in areas of Eastern Congo removed from control by the central state, managing a team that collected village-level panel data on current armed groups. I develop a model that introduces optimal taxation theory to the decision of armed groups to form local "monopolies of violence", and argue that the returns to such decision hinge on their ability to tax the local population. A sharp, exogenous rise in the price of a bulky commodity used in the electronics industry, coltan, leads armed groups to impose a "monopoly of violence" in coltan villages. A later increase in the price of gold, easier to conceal and hence more difficult to tax, does not. Results from auxiliary tests provide additional support to the theory. The findings support the hypothesis that the expected Revenue from taxation, in particular tax base elasticity, is a determinant of state formation.;In Chapter 2, I go a step further, and challenge the theory associating monopolies of violence to state-like behavior. To observe the behavior of criminal "monopolies of violence", I draw on the same data collection exercise as in Chapter 1. I apply optimal taxation theory to armed groups, and show that armed groups will tax and promote growth like states whenever their "monopoly of violence" is uncontested. Based on this data, I find that criminal "monopolies of violence" consistently provide public goods, develop popular support, and elaborate taxation schemes consistent with optimal taxation and European medieval states. In addition, using the timing of a peace agreement as an instrument for the presence of armed men in the village, I establish that the village "monopolies of violence" have a positive impact on economic activity. In 2003, a peace agreement (Sun-city agreement) led a large number of village "monopolies of violence" to relocate, in order to integrate the national government. This led to a security vacuum. I find that the vacuum caused by this peace agreement led to reductions in economic activity. I then use the timing of a large scale military operation in order to instrument for changes in the time horizon of existing village "monopolies of violence", which came under threat as a result of the military operation. I find that when their "monopoly of violence" comes under threat, armed groups turn from partial expropriation through stable taxation with full commitment, to full-scale violent expropriations. These findings support the view that the origins and workings of states can be obtained from criminal "monopolies of violence", but only if they have a stable time horizon.;In Chapter 3, I turn to the experimental component of the dissertation. Having established the causes that lead to the emergence of states---taxation and coercion---I investigate how to take advantage of the state in order to increase trade in contexts where distrust prevents trade to occur. In this chapter, I provide evidence on the impact of state contracts on trade. As a foundation for this chapter, I created a home delivery business in East Congo. Traders sell a domestic good in households of different ethnic groups, and commit to deliver the good in the future. Shared ethnicity and formal contracts are equally effective at increasing trade by sustaining trust. Furthermore, contracts do not crowd-out ethnic group based mechanisms of trust production. Why do contracts increase trust? Results from a last experiment suggest that contracts are enforceable. However, they only protect claimants of ethnic groups that have captured the state administration. These findings suggest that even the state apparatus is embedded in the social structure, and expanding the reach of the state may have positive welfare effects, only for the groups that have vested control in the state institutions. (Abstract shortened by UMI.). |
