Risk, Transaction Costs, and Tax Assignment: Government Finance in the Ottoman Empire

Abstract

Risk and transaction costs often provide competing explanations of institutional outcomes. In this article we argue that they offer opposing predictions regarding the assignment of fixed and variable taxes in a multi-tiered governmental structure. Although the central government can pool regional risks from variable taxes, local governments can measure variable tax bases more accurately. Evidence on tax assignment from the mid-sixteenth-century Ottoman Empire supports the transaction cost explanation, suggesting that risk matters less because insurance can be obtained in a variety of ways.