Endogenous Taxation in Ongoing Internal Conflict and efficient tax systems at the local level.Moreover. the share of tax revenues generated locally (de Mello security provision,property rights protections,and a Jr.2000).3 It also ranks in the middle of large devel- variety of development projects at the local level could, oping countries in terms of local revenue mobilization, in theory,facilitate state-building by shaping citizens above Indonesia at 38%but below India at approxi- preferences and behaviors in ways that favor the state mately 62%(Bird 2012).Third,local government au- over its competitors. thorities have substantial freedom to shape property Several potential mechanisms have been proposed and tax institutions.They can choose tax rates,order to explain the relationship between internal conflict or impede updates on the land value,select revenue and state capacity that are relevant for thinking about collection methods,and alter penalties and incentives. the relationship between conflict and tax performance In theory,this autonomy could facilitate efficient local at the local level.To mention a few:(1)By destroying tax administration by allowing the system to be tailored physical capital,inducing forced migration,and reduc- to the needs of each municipality.In practice,in the ing the market value of private property in affected ar- context of uneven state presence and varying degrees eas,conflict deteriorates the tax base.(2)Conflict gen of contestation by illegal armed groups,local institu- erates negative reciprocity of tax payers toward a state tions can be captured by private groups with vested that they judge to have failed to protect them(Car- interests.4 denas,Eslava,and Ramirez 2014).(3)A conflict envi- Fourth,and most importantly,the main combatants ronment reduces the return of productive activities and had clear preferences regarding state-backed property raise that of illegal businesses,which do not pay taxes to rights throughout much of the war.which had impli- the state(Besley and Persson 2008).(4)Armed groups cations for the local tax base and performance.Right- create their own governance systems that divert civil- wing paramilitaries favored land owners and promoted ians'resources away from the state and crowd out state the accumulation of large estates,which served as institutions (Mampilly 2011;Arjona 2016;Sanchez de means to launder illegally acquired capital (through la Sierra 2017).(5)Conflict facilitates the emergence the drug trade,for example)or realize economies of 4r元 of interest groups with de facto power(for instance be- scale in agricultural production and cattle ranching cause of their access to weapons)that can capture local (Reyes Posada 2007 [1991]).5 On the left-wing side, political and economic institutions(Eaton 2006;Lopez both FARC and ELN guerrilla groups aimed to re- 2010;Mampilly 2011).Such capture prevents state in- place what they characterized as an unjust state and stitutions from eliminating competitors,and from cre- claimed to be acting on behalf of peasants and work- ating a durable and credible relationship with citizens ers.The guerrillas backed land invasions of state and in these regions. private property in many areas (e.g.,Steele 2017).The We focus on the latter political economy mechanism. FARC also viewed state-recognized private property In the context of internal conflicts,local tax institu- as illegitimate or unnecessary:in its VIII Conference tions (both formal and informal)are shaped by differ- in 1993,it still backed collectivized property (Bernal ent types of vested interests.We explore the extent to Morales 2014).(During peace talks with the Santos which armed groups shape existing property and tax administration in 2012,the FARC supported land for- institutions differently depending on their preferences. malization for the first time.)In areas that they influ- To the best of our knowledge,this mechanism has not enced,the guerrillas regulated property in parallel to been studied in the previous literature,either theoret- the state.For instance,they claimed the right to re- ically or empirically.2 Our argument is that local tax distribute unused land or land from narcotraffickers and property rights institutions are shaped by illegal 8 (Bernal Morales 2014).5 armed actors who influence state institutions to further These positions on property rights stem from their interests and those of the civilian groups they fa- ideological commitments and make sense from the vor.Specifically,we expect that right-wing paramilitary perspective of combatants trying to maximize their groups will favor establishing formal property rights control over territory,and to mobilize supporters.His- for land owners,while left-wing insurgents will do the torically,land titling and formalization has favored opposite. We test this argument in Colombia,which has four traits that make it an ideal setting for studying the re- The share of tax revenue collected locally is the standard measure lationship between civil conflict,institutional capture of revenue decentralization in the literature,but is only available for limited subset of countries. and local tax performance.First,the dynamics of the 4 This insight follows naturally from the theory in Persson and eys internal conflict vary substantially across the country's Tabellini(2002),among others,in which heterogeneous agents take 1,122 municipalities.Moreover,within each municipal- advantage of the discretion granted them. ity,violence also varies across different periods of the Paramilitaries displaced people to take their land and titling in ar- war.Second,Colombia sits roughly in the middle of eas with paramilitary presence was not always aboveboard.For ex- the distribution of non-OECD countries in terms of ample.public notaries,the officials charged with validating the prove- nance of land,were infiltrated by paramilitaries (e.g.,Duran 2012: Verdad Abierta 2012). 6 Internal divisions with the FARC existed,but it was a centralized 2 See Eaton(2006)and Lopez(2010)on other forms of capture by organization that adopted policies in its conferences that were rel- illegal armed groups in Colombia.Mampilly (2011)analyzes rebel atively well enforced throughout.The paramilitaries were more de- 士 governance more broadly and Arjona(2014)finds that armed groups centralized but none challenged the basic legitimacy of state institu operated alongside state institutions in roughly one-quarter of the tions (even if they argued that they could be run more effectively) Colombian communities in her sample. (Gutierrez Sanin 2008;Romero 2003). 997Endogenous Taxation in Ongoing Internal Conflict and efficient tax systems at the local level. Moreover, security provision, property rights protections, and a variety of development projects at the local level could, in theory, facilitate state-building by shaping citizens’ preferences and behaviors in ways that favor the state over its competitors. Several potential mechanisms have been proposed to explain the relationship between internal conflict and state capacity that are relevant for thinking about the relationship between conflict and tax performance at the local level. To mention a few: (1) By destroying physical capital, inducing forced migration, and reduc￾ing the market value of private property in affected ar￾eas, conflict deteriorates the tax base. (2) Conflict gen￾erates negative reciprocity of tax payers toward a state that they judge to have failed to protect them (Cár￾denas, Eslava, and Ramírez 2014). (3) A conflict envi￾ronment reduces the return of productive activities and raise that of illegal businesses,which do not pay taxes to the state (Besley and Persson 2008). (4) Armed groups create their own governance systems that divert civil￾ians’ resources away from the state and crowd out state institutions (Mampilly 2011; Arjona 2016; Sánchez de la Sierra 2017). (5) Conflict facilitates the emergence of interest groups with de facto power (for instance be￾cause of their access to weapons) that can capture local political and economic institutions (Eaton 2006; López 2010; Mampilly 2011). Such capture prevents state in￾stitutions from eliminating competitors, and from cre￾ating a durable and credible relationship with citizens in these regions. We focus on the latter political economy mechanism. In the context of internal conflicts, local tax institu￾tions (both formal and informal) are shaped by differ￾ent types of vested interests. We explore the extent to which armed groups shape existing property and tax institutions differently depending on their preferences. To the best of our knowledge, this mechanism has not been studied in the previous literature, either theoret￾ically or empirically.2 Our argument is that local tax and property rights institutions are shaped by illegal armed actors who influence state institutions to further their interests and those of the civilian groups they fa￾vor. Specifically, we expect that right-wing paramilitary groups will favor establishing formal property rights for land owners, while left-wing insurgents will do the opposite. We test this argument in Colombia, which has four traits that make it an ideal setting for studying the re￾lationship between civil conflict, institutional capture, and local tax performance. First, the dynamics of the internal conflict vary substantially across the country’s 1,122 municipalities. Moreover, within each municipal￾ity, violence also varies across different periods of the war. Second, Colombia sits roughly in the middle of the distribution of non-OECD countries in terms of 2 See Eaton (2006) and López (2010) on other forms of capture by illegal armed groups in Colombia. Mampilly (2011) analyzes rebel governance more broadly and Arjona (2014) finds that armed groups operated alongside state institutions in roughly one-quarter of the Colombian communities in her sample. the share of tax revenues generated locally (de Mello Jr. 2000).3 It also ranks in the middle of large devel￾oping countries in terms of local revenue mobilization, above Indonesia at 38% but below India at approxi￾mately 62% (Bird 2012). Third, local government au￾thorities have substantial freedom to shape property and tax institutions. They can choose tax rates, order or impede updates on the land value, select revenue collection methods, and alter penalties and incentives. In theory, this autonomy could facilitate efficient local tax administration by allowing the system to be tailored to the needs of each municipality. In practice, in the context of uneven state presence and varying degrees of contestation by illegal armed groups, local institu￾tions can be captured by private groups with vested interests.4 Fourth, and most importantly, the main combatants had clear preferences regarding state-backed property rights throughout much of the war, which had impli￾cations for the local tax base and performance. Right￾wing paramilitaries favored land owners and promoted the accumulation of large estates, which served as means to launder illegally acquired capital (through the drug trade, for example) or realize economies of scale in agricultural production and cattle ranching (Reyes Posada 2007 [1991]).5 On the left-wing side, both FARC and ELN guerrilla groups aimed to re￾place what they characterized as an unjust state and claimed to be acting on behalf of peasants and work￾ers. The guerrillas backed land invasions of state and private property in many areas (e.g., Steele 2017). The FARC also viewed state-recognized private property as illegitimate or unnecessary: in its VIII Conference in 1993, it still backed collectivized property (Bernal Morales 2014). (During peace talks with the Santos administration in 2012, the FARC supported land for￾malization for the first time.) In areas that they influ￾enced, the guerrillas regulated property in parallel to the state. For instance, they claimed the right to re￾distribute unused land or land from narcotraffickers (Bernal Morales 2014).6 These positions on property rights stem from ideological commitments and make sense from the perspective of combatants trying to maximize their control over territory, and to mobilize supporters. His￾torically, land titling and formalization has favored 3 The share of tax revenue collected locally is the standard measure of revenue decentralization in the literature, but is only available for a limited subset of countries. 4 This insight follows naturally from the theory in Persson and Tabellini (2002), among others, in which heterogeneous agents take advantage of the discretion granted them. 5 Paramilitaries displaced people to take their land and titling in ar￾eas with paramilitary presence was not always aboveboard. For ex￾ample, public notaries, the officials charged with validating the prove￾nance of land, were infiltrated by paramilitaries (e.g., Durán 2012; Verdad Abierta 2012). 6 Internal divisions with the FARC existed, but it was a centralized organization that adopted policies in its conferences that were rel￾atively well enforced throughout. The paramilitaries were more de￾centralized but none challenged the basic legitimacy of state institu￾tions (even if they argued that they could be run more effectively) (Gutiérrez Sanín 2008; Romero 2003). 997 Downloaded from https://www.cambridge.org/core. Shanghai JiaoTong University, on 26 Oct 2018 at 03:53:05, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0003055418000333