Optimal Rent Extraction in Pre-Industrial England and France – Default Risk and Monitoring Costs

the difference in interest rates for government borrowing: “cannot be
easily attributed to any other source than default risk” [1992, p. 5].
Bordo and White [1991] also argue that the persistent default risk of
French monarchs gave rise to the large differences in interest rates for
government borrowing.²¹ In support of this thesis, Quinn [2001, p. 593]
writes: “The Glorious Revolution’s political settlement appears to have
reduced the risk premium on sovereign debt”. Ferguson [2001, p. 172]
finds that, in contrast to England, “French yields in the eighteenth and
nineteenth centuries reveal starkly the impact of fiscal unreliability on
investor confidence”.²²

III. The Model

We consider the provision of a single homogeneous governmental good
and define it as issuing a permit. An agent (government official or private
monopolist) has the sole right to provide, and the opportunity to restrict,
the quantity of permits. We think of the agent as a tax-collector who
charges a tax which citizens must pay in order to produce or consume.
But the model could equally well reflect the sale of permits and licences,
²¹The French royal government defaulted wholly or partially on their loans in 1698,
1714, 1721, 1759, 1770 and 1788 [Ferguson 2001].

²²Adifferent explanation, however, is given by Epstein [2000] who argues that the
decline in English interest rates was the result of the country’s financial revolution
rather than of a revolution in political freedom and rights. Another explanation is
given by Weir [1989] who argues that the French interest rate was high because the
monarchs wanted to subsidize the urban middle class that lent the money. In this pa-
per, we show that a high interest rate is not a suitable instrument for subsidies since
it reduces the rents that can be extracted through tax collection. Yet another expla-
nation is provided by Hicks [1969] who argued that, compared to absolutisms, the
relative continuity provided by the English Parliamentarism promoted low interest
rates.

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