Extractive States: The Case of the Italian Unification

One of the most puzzling issues in economics is the huge divide between the North and South of Italy despite more than 150 years of common formal institutions. We show that the opening of the present-day gap in culture and economic outcomes is the consequence of the region-specific tax policies selected between 1861 and 1911 by the elite of the Kingdom of Sardinia, which annexed the rest of Italy in 1861. Regional pre-Unification tax revenues indeed are mainly explained by the contemporaneous farming productivity but not by the region's political relevance for the Kingdom of Sardinia's elite, whereas the opposite is true for the post-Unification period. Moreover, tax distortions, tax-collection costs, and each region's political relevance significantly shaped the increasing post-Unification differences in income per capita, electoral turnout, and human capital between the North and the South. This evidence, which is consistent with a two-region, two-social class model, sheds new light on the incentives of a dominating group in a political or economic union, e.g., the European Union.