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

Hill 1970, Chandaman 1975 and Brewer 1988].⁵ The development of
the English system of revenue collection stands in stark contrast to the
situation in France; here, not only tax farming was continuously used
for rent extraction until the mid-nineteenth century [Brewer 1988 and
Kiser and Kane 2001], but public finances fared poorly and tax farmers
kept earning large rents [Brewer 1988 and Ekelund and Tollison 1981].

In this paper, we offer a theory explaining the developments that
occurred in England during the seventeenth century, the differences with
France and their consequences for the amount of rents appropriated by
the government, private contractors and government officials.

We model the government’s choice between tax farming and direct
tax collection as a tradeoff between the ex-ante inefficiencies of tax farm-
ing and the ex-post monitoring costs of direct tax collection. While under
tax farming the government cannot extract the full value of the office
sold because of auction inefficiencies⁶ , under direct tax collection the
government must incur a cost to monitor officials to make sure that they
do not steal tax revenues.

When monitoring costs are large, the government prefers to auction
off offices and cash in up-front payments.⁷ The distributional conse-
quence of such choice is that in so doing, the central authority allows
contractors to earn large rents. On the other hand, if monitoring costs

⁵ Ferguson [2001, p. 90] writes “In the 1670s, Charles II disposed of 2.7 times as
much revenue as his benighted father had managed with such difficulty to collect
just a half century earlier. Fifty years later, the revenues of the newly established
Hanoverian regime were eight times, and in the 1770s eleven times, greater than those
spent by Charles I.”

⁶ In our model, bidders have private information about their interest rate, and
therefore about their value of the office, which together generates the inefficiency.

⁷ Swart [1980], Brewer [1988] and Kiser and Kane [2001] all argue that when the
costs of monitoring officials were high, monitoring was scarce and theft common.

<<   1   2   3   4   5   6   7   >>

More intriguing information