Abstract
A series of formal models is developed to explore the possibility of an efficient social
contract between a revenue-maximizing state and economic actors who benefit from
some good or service the state can provide. Central to the analysis is the interaction
of two factors: the ability of the state to commit to leaving economic actors with a
portion of their production, and the ability of those actors to hide production from
the state. Economic actors have an incentive to hide revenues from the state when
the state is unable to commit to leaving behind a portion of unhidden production, and
need to be compensated for forgoing that option when the state can commit. Given
that some actors find it easier to hide revenues than others, revenue-maximizing states
will typically favor economic activity which is more “taxable.” This result — that an
efficient social contract will be impossible, even when the state is able to commit —
fails to hold only under a pair of conditions probably not reflective of empirical reality.
Application of these models to the analysis of survey data finds patterns of revenue
hiding and state support strongly suggestive of commitment failures in postcommunist
states, and weakly so of a state which has the ability to commit, albeit only to an
inefficient tax.
2
Convention