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.
In this article, we study the paradigmatic case of the Protestant Reformation: the moment when the most powerful institution in Western Europe—the Catholic Church—experienced a profound competitive shock.
We document how the introduction of religious competition during the Reformation transformed the European economy, sharply shifting the allocation of resources from religious to secular uses.
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.Increased labor demand by enriched and empowered rulers, and the decline in clerical services required for salvation in Protestant theology, will reduce church sector labor demand relative to the secular sector.As a consequence, returns to investments in human capital specific to church careers will fall, and forward-looking students will shift their human capital investments accordingly.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.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.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.We present a conceptual framework that captures a core feature of religion in history: the role in legitimizing political elites (Weber 1978; North, Wallis, and Weingast 2009).Within our framework, the pre-Reformation era can be understood as an equilibrium in which a monopolist religious producer (the Catholic Church) provided political legitimacy to secular authorities at a high price—charged in the form of control over resources, tax exemptions, and some degree of political power.