2014), “State Capacity and Economic Development: A Network Approach,” mimeo

We study the direct and spillover effects of local state capacity using the network of Colombian munici-palities. We model the determination of local and national state capacity as a network game in which each municipality, anticipating the choices and spillovers created by other municipalities and the decisions of the national government, invests in local state capacity and the national government chooses the presence of the national state across municipalities to maximize its own payoff. We then estimate the parameters of this model using reduced-form instrumental variables techniques and structurally (with GMM or SMM). To do so we exploit both the structure of the network of municipalities over which spillovers take place and the historical roots of local state capacity as the source of exogenous variation. These historical in-struments are related to the presence of colonial royal roads and local presence of the colonial state in the 18th century, factors which we argue are unrelated to current provision of public goods and prosper-ity except through their impact on their own and neighbors ’ local state capacity. Our estimates of the effects of state presence on prosperity are large and also indicate that state capacity decisions are strategic complements across municipalities. Bringing all municipalities below median state capacity to the median, without taking into account equilibrium responses of other municipalities increases median fraction of th