Risk and transaction costs often provide competing explanations of institutional outcomes. In this paper we argue that they offer opposing predictions regarding the assignment of fixed and variable taxes in a multi-tiered governmental structure. While 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.
Cosgel, Metin M. and Miceli, Thomas J., "Risk, Transaction Costs, and Tax Assignment: Government Finance in the Ottoman Empire" (2003). Economics Working Papers. 200304.