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

the debt issued (even though the expected quantity is reduced). The net
present value of the CA’s income increases both directly and through the
adjustment of the rent-extraction mechanism.

This extension of the model, which takes into account not only the
CA’s probability to commit to investors but also the probability to com-
mit to its public officials, is consistent with the historical evidence. The
French monarchs’ best response to their low probability to commit was
to use up-front payments in a system of tax farming. The English Par-
liament, in contrast, could commit to its decisions and therefore found
ex-post payments by government officials attractive.

V. Conclusions

In this paper, we propose a new perspective on the system of taxa-
tion in England in the second half of the seventeenth and the beginning
of the eighteenth century, when a changeover to direct collection gave
rise to better public finances than the system of its major competitor,
France. In our model, the leading regime extracts rents from taxation
or agents’ sales of government goods, such as permits, either through
up-front payments or through ex-post payments based on the quantity
of goods officials sell. Both interest rates on government borrowing and
monitoring costs influence which scheme politicians prefer. Owing to
their higher default risk, French monarchs faced higher interest rates
on borrowing than the English Parliament. In response, they continued
to use tax-farming and grant monopoly rights, which led to large rents
to the contractors and small incomes for the monarchs. In addition,
since monitoring costs were higher in France, fees were cumbersome to
extract, which also made the granting of monopolies more attractive.
In England, in contrast, fees were collected ex post within the govern-

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