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

are low the government opts for direct tax collection. This allows it to
enjoy larger revenues because now it is the government, not the official,
to collect most of the value of the office.

The predictions of this theory are in line with historical evidence.
Indeed, it is a common view among scholars [Chandaman 1978, Ekelund
and Tollison 1981, Brewer 1988 and Kiser and Kane 2001] that during
the seventeenth century the cost of monitoring officials in England fell
much below the one prevailing in France, where the government’s collec-
tion of indirect taxes was so difficult to be deemed “an administrative
nightmare” [Brewer, 1988 p. 129].

This evidence supports the view that low monitoring costs induced
English monarchs to switch to tax collection, which ultimately improved
their finances, whereas the high monitoring costs that characterized
France throughout the period led the French government to stick to
tax farming to its great financial disadvantage.

Beyond ex-post monitoring, a fundamental difference between tax
farming and direct tax collection is the timing of government’s revenues.
With tax farming the government receives an immediate up-front pay-
ment, with direct tax collection revenues materialize in a second period.
It is thus likely that differences in government’s access to debt finance
shaped the choice of either method.

Incorporating this intertemporal element into the choice of the cen-
tral authority, we find that when the government’s default risk is high,
since it faces limited borrowing, ex-post collection in combination with
ex-ante borrowing is unattractive. As a result, the government prefers
to let a contractor earn large rents to enhance his up-front payments.
When instead the government’s default risk is low, direct tax collection

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