Fiscal Legibility and State Development: Theory and Evidence from Colonial Mexico

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We examine how fiscal legibility, the ability of central authorities to observe local economic conditions for the purposes of taxation, shapes political centralization and state development. When rulers lack information about the periphery, they may cede autonomy to tax-collecting intermediaries to encourage fiscal performance. As information quality improves, rulers are better able to monitor and sanction local officials, allowing them to tighten control over taxation and establish more direct state presence. Centralization encourages additional investment in improving fiscal legibility, leading to long-term divergence in state development. We study the consequences of a technological innovation that dramatically improved the Spanish Crown's fiscal legibility in colonial Mexico: the discovery of the patio process to refine silver. We show that political centralization differentially accelerated in affected districts, that these areas saw disproportionate state investment in informational capacity, and that they were more resilient to institutional decline over a century later.