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.
13
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