State Capacity and Public Goods: Institutional Change, Human Capital, and Growth in Early Modern Germany

Abstract: What are the origins and consequences of the state as a provider of public goods? We study institutional changes that increased state capacity and public goods provision in German cities during the 1500s, including the establishment of mass public education. We document that cities that institutionalized public goods provision in the 1500s subsequently began to differentially produce and attract upper tail human capital and grew to be significantly larger in the long-run. Institutional change occurred where ideological competition introduced by the Protestant Reformation interacted with local politics. We study plague outbreaks that shifted local politics in a narrow time period as a source of exogenous variation in institutions, and find support for a causal interpretation of the relationship between institutional change, human capital, and growth.