Size and Dynastic Decline: The Principal-Agent Problem in Late Imperial China 1700-1850

This paper argues that one reason for China’s relative economic decline in the 19th century was its size. A ruler governing a big country faces a severe principal-agent problem. Given his monitoring difficulties, his agents have strong incentives to extort from the taxpayers, especially the politically weak ones. To prevent over-exploitation that could foment rebellion, the ruler has to keep taxes low. The result is the paradox of low state revenue despite a heavy tax burden on the poor. Economic growth could further exacerbate the situation as it increases the incentives for corruption. I apply this model to late imperial China and find that its predictions are well supported by empirical evidence. The Qing state taxed lightly and official land tax burdens were especially low in regions far from the capital. Furthermore, the fiscal and managerial capacity of the Qing dynasty began to contract steadily during the prosperous 18th-century, sowing the seeds for China’s socio-economic problems of the 19th-century. (JEL N15, N45, O43) ∗Niehaus Center for Globalization & Governance, Princeton University, Robertson Hall 441A, Princeton, NJ 08544. Email: [email protected]. This paper is a revised version of Chapter 2 of my dissertation, written under the supervision of Joel Mokyr, David Austen-Smith, Matthias Doepke, and Melissa Macauley. I am indebted to them for their guidance and encouragement. I received many helpful comments from seminar participants at the National University of Singapore, Peking University, Northwestern University, University of Michigan, Hong Kong University of Science & Technology, Williams College, California State University at Fullerton, World Bank, and Universitat Pompeu Fabra as well as conference participants at the 2009 Economic History Association Annual Meeting poster session, the 2010 Midwest Economic Association Annual Meeting, the 2011 Asia-Pacific Economic and Business History Conference, the 2011 Cliometrics Conference, and the 2011 NBER China Conference. Dayi Sun, Shiu-Lin Tsai, Yanfeng Wang, and Biao Xiang provided help to access original documents and other data. Financial support from the University Research Grants Committee at Northwestern University and the Economic History Association Sokoloff Fellowship is gratefully acknowledged. All errors are mine.