Dynamic Mechanism Design Under Monitoring Frictions: Evidence from Kautilya's Arthashastra

This study constructs a dynamic structural model to examine the long-run stability of Mauryan institutions as set out in the Arthashastra (c. 322-185 BCE). We move beyond simple calibration and carry out formal structural estimation to isolate monitoring frictions as a key source of divergence across ancient empires. Drawing on GIS-derived travel-time measures across the Gangetic plain and dendrochronological evidence of monsoon variation, we recover the monitoring cost parameter using the Simulated Method of Moments (SMM). The distinctive Mauryan choices: a fixed one-sixth tax share and an extreme 800:1 wage ratio between senior councillors and junior clerks, arise endogenously from high geographic dispersion (average oversight distance ≈ 850 km) combined with substantial output volatility. Counterfactual simulations, framed in the spirit of synthetic control methods, show that replacing Mauryan direct administration with Roman-style tax farming would have reduced imperial survival by approximately 45 years. The results indicate that Kautilyan design deliberately favoured systemic resilience against shocks over short-term extractive efficiency, offering an early illustration of mechanism design in environments marked by severe information constraints.