The purpose of this paper is to analyze the causal link between government regulation of religion and the choice of investing in human and physical capital.
The paper uses an analytical model with a government setting the output quota to transfer to religious activities. This depends on the extent to which it is an ideological government that uses religion either for legitimacy aims or for the ideological control of population. Workers and entrepreneurs observe the quota and simultaneously choose the investment in human and physical capital, which may trigger, à la Acemoglu, social increasing returns.
Directing resources to religious activities may be detrimental to output performance. This may occur if an ideological government sets the optimal quota above the quotas preferred by private agents. This negatively affects the investment in physical and human capital and output performance.
Despite the importance of government regulation of religion in the literature, its effect on output performance has not been thoroughly analyzed yet. In this respect, the paper aims to further investigate the causal links between religion regulation related to government type and the investments in human and physical capital and the output level.
