payment. In other words, the agent’s profit is high because the CA wants
it this way. Independently of the choice of system of rent-extraction, the
debt issued will be small as investors expect low ex-post incomes. In
addition, since a system of up-front payments is selected the debt issued
is even smaller. The CA’s rent is low even though it adjusts the system
of rent-extraction to the unfavorable conditions. When the default risk
and monitoring costs are low, a high fee is used which reduces the agent’s
profit. The debt and the CA’s profit are large as we would expect, and
further enhanced by the fact that ex-post collection is adopted.
Our theory thus reflects the historical facts well. Before the mid-
seventeenth century, the conditions were not favorable for direct collec-
tion neither in France nor in England.28 During this time, the public
finances were poor and tax farmers and monopolists’ rents large [Brewer
1988, Swart 1980]. As the cost of monitoring officials in England was
reduced, ex-post collection became more attractive. Consequently, Eng-
land started to change the system of revenue collection after the Civil
War in 1640. As O’Brien [2002, p. 262] writes, the fiscal system started
to change “when its /England’s/ domestic economy began to generate
the kind of accelerated urbanization, commercialization, and concentra-
tion that facilitated the collection of duties on domestic production and
imports”. But this change was partial; offices were still sold [Brewer
1988]. Not until after the Glorious Revolution, when the English default
28 Matthews [1958] writes “The late-medieval \French\ monarchy was not equipped
to deal with individuals in their guise as producers, wholesalers, retailers, merchants,
and consumers. The complicated activity of an economy of buying and selling was
too diffuse yet too localized, too subject to unforeseen changes, for a rudimentary
government to cope with on a centralized basis...Consequently, as taxes (such as
excises and customs duties) which required intensive bureaucratic management were
levied, they were farmed”.
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