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



CESifo Working Paper No. 1464

Optimal Rent Extraction in

Pre-Industrial England and France

- Default Risk and Monitoring Costs

Abstract

Beginning in the mid-seventeenth century, England changed its system of raising revenues
from tax farming, combined with the granting of monopolies, to direct collection within the
government administration. Rents were then transferred from tax farmers and monopolists to
the central government such that English public finances improved dramatically compared to
both the old system and to its major competitor, France. We offer a theory explaining this
development. in our view, a cost of tax farming is the ex-ante inefficiency due to the auction
mechanism while a cost of direct collection is the ex-post monitoring cost the government
incurs to prevent theft. When the monitoring cost is high the government therefore allows tax
farmers to extract large rents to enhance their up-front payments. in addition, because
revenues materialize late under direct collection, and since the government faces limited
borrowing, a high default risk makes a system of up-front collection attractive. The results of
the model are consistent with historical facts from England and France.

JEL Code: N43, H11.

Mikael Priks

Center for Economic Studies
at the University of Munich
Schackstr. 4

80539 Munich
Germany

[email protected]

This paper was written in part at Harvard University and in part at stockholm University. i
wish to thank Ted Bergstrom, Patrick o’Brien, Gregory Clark, Nicola Gennaioli, Edward
Glaeser, Marko Kothenbürger, Rolf Henriksson, Sten Nyberg, Panu Poutvaara, Ilia Rainer,
Jean-Laurent Rosenthal, Sheilagh Ogilvie, Andrei Shleifer, David Stromberg, Jakob
Svensson, Jenny Save-Soderbergh, Johan Soderberg, Francesco Trebbi, Thierry Verdier, Tom
Weiss and seminar participants at Stockholm University, the University of Munich, and the
EEA 2003 Conference in Stockholm. i also thank the members of the EEA 2003 Young
Economist Award committee for their support of the paper.



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