Fiscal legibility and state development: Theory and evidence from colonial Mexico

Abstract We examine how fiscal legibility, the ability of central authorities to observe local conditions for the purposes of taxation, shapes political centralization and state development. When rulers lack information about the periphery, they may benefit from ceding autonomy to tax‐collecting intermediaries to encourage fiscal performance. As information quality improves, rulers become better able to monitor and sanction local officials, allowing them to tighten control over taxation and establish more direct state presence. Centralization, in turn, encourages 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 and that these areas subsequently saw disproportionate state investment in informational capacity, altering the trajectory of state development.