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Taxation and Public Goods Provision in China and Japan before 1850

We develop a principal-agent model to study taxation and public goods provision in China and Japan on the eve of the modern age. Before 1850, both Qing China and Tokugawa Japan were ruled by stable dictators who relied on bureaucrats to govern their domains. We hypothesize that agency problems increase with the geographical size of a domain. In a large domain, the ruler’s inability to closely monitor bureaucrats creates opportunities for the bureaucrats to exploit taxpayers. To prevent overexploitation and maintain political stability, the ruler has to keep taxes low and government small. By contrast, in a smaller domain, lower monitoring costs allow the ruler to tax and regulate the economy to a greater extent without risking popular resistance. To test these implications, we assemble primary and secondary sources and find that tax rates were higher and the rulers more active in public goods provision in Japan than in China. Furthermore, tax revenues tracked demographic patterns more closely and public goods provision was more responsive to socio-economic change in Japan. We conjecture that these factors contributed to Japan’s greater resilience to the rise of the West after 1850.