Shifts in resources toward secular authorities will also be reflected in fixed investments, such as large-scale urban construction, which embody a full set of factors of production.
The new equilibrium will also have implications for the allocation of resources within the secular sector: specifically, resources will shift toward uses that reflect the enhanced bargaining power of secular rulers.
We argue that the introduction of religious competition crucially affects a second market—in which state authorities secure political legitimacy from religious elites (Rubin 2017).
Introducing this missing market generates novel hypotheses.
We directly test the implications of our framework for resource allocation using rich microdata.
We assemble new, highly disaggregated data on the degrees received by and occupational outcomes of German university graduates and on construction events at the town-by-year level, across over 2,000 German towns.First, it shifted the allocation of upper-tail human capital.Graduates of Protestant universities increasingly took secular, especially administrative, occupations.Qualitative and quantitative evidence show sharp reallocations toward secular control of resources—not just a transfer from Catholic Church uses to Protestant ones.Transfers of resources from the control of church elites to secular lords occurred in both Catholic and Protestant territories but were particularly pronounced in the latter.During the Reformation, the value of Catholic legitimacy fell and the bargaining power of secular rulers vis-à-vis religious elites rose.Protestant reformers’ need to strike a bargain with secular lords meant they would accept a lower price in exchange for conferring legitimacy.We argue that the interaction between religious competition and politics was critical to this process.Prior research on religious competition focuses on the relationship between producers and consumers of religion in a market for salvation (Iannaccone 1998; Ekelund, Hébert, and Tollison 2006; Iyer 2016).Using novel microdata, we document an important, unintended consequence of the Protestant Reformation: a reallocation of resources from religious to secular purposes.To understand this process, we propose a conceptual framework in which the introduction of religious competition shifts political markets where religious authorities provide legitimacy to rulers in exchange for control over resources.