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



Proof of Proposition 2

A higher probability to commit leads to more tax-farming since

∂ff∙ = - s - 1   ,2(1 - f)⅞⅛ a

(35)


∂λ sλ — λ + 1   (1 + δ) φ2

where φ > 0.

The official’s profit is increased because

NPV    (1 + δ) (s - 1) (n+1 ) (1 - c ) n+19 T ∩ ∕ofi

=32π > 0.      (36)

∂λ                  φ3

The CA’s profit is reduced as

dNpv = - (1 - c) (s - 1) (1 - c - n(1 + δ) ,sλ - λ + 1)) 2πτ < о
∂λ                   (1 + δ)(sλ λ + 1)2 2             π

(37)

where 1 n-ɪ (1 + δ) (sλ λ + 1) > 0 for θ > 0.

The debt, finally, is reduced since

∂Debt
∂λ


_ ∂θ* a *(1

= ∂λ(       2b


λ+λs) ) βθ(s


1) < 0.


(38)


28




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