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

cases, the CA selects a low fee to enhance the agents’s profit and in turn
his up-front payments. In other words, the CA selects a system of private
contracting. When the default risk and the monitoring cost are low the
ex-post incomes are large. To exploit this fact, the CA uses a high fee,
i.e., it selects a system of direct collection within the government.

We next consider the distributional aspects of the model. The CA’s
net present value is given by

= _n. = ___________(1 - t,________∏T.

NPV (1 + δ)(2(1 - c) - n-1 (1 + δ)) ,

and the agent’s profit is equal to

ɪ (1 - c ?

_______n+1 ∖     tJ_________
n-1 (1 + ^δ) - ²(1 - c))²

The expected price level is equal to

We can now study how the default risk and the monitoring cost affect
these variables.

Proposition 2 The higher the default risk, δ, and the larger the moni-
toring cost, c, the higher is the agent’s profit and the lower is the value
of the central authority’s incomes, the debt issued and the price level.

Proof. See Appendix. ■

When the default risk and the monitoring costs are high the CA re-
duces the fee, θ, to increase the agent’s profit and consequently up-front

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