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



Overall, our paper contributes to this literature by revisiting its ar-
guments within a micro-founded model where a self interested central
authority chooses between tax farming and direct tax collection.

There are also several related papers based on economics modeling.
Becker and Stigler [1974], and later Carmichael [1985], have emphasized
that, to avoid shirking, prospective tax inspectors could be required to
post bonds to the government.10 In our model, the up-front payment
is not a bond but a sunk cost. Toma and Toma [1992] suggest that
tax farmers, in contrast to government officials, are residual claimants,
which gives them incentives to work hard but also to overdetect tax-
evasion since they do not take into account the utility loss this inflicts
on taxpayers. Government officials on the other hand have incentives
ever, since these states were heterogeneous it is beyond the scope of this paper to
give a full treatment of the German case. In short, the German states, beginning
with Prussia and ending with Württemberg, changed their fiscal system of up-front
collection in favour of ex-post collection in the beginning of the nineteenth century
[Ogilvie 1999]. Before the change, the system typically left officials, and not the cen-
tral authority, rich [see e.g. Vierhaus 1999]. In line with our theory, the monitoring
cost and the government default risk were reduced at the time of the change in the
fiscal system. The infrastructure in the German states started to develop significantly
at the end of the eighteenth century [Ogilvie 1999 and 2000]. The interest rates for
state borrowing in the larger German states fell from around 5 percent to around 4
percent in the beginning of the nineteenth century [Homer 1963 and Hoffmann 1965].
A reason for this may have been that Germany was laid waste by Napoleon before
the change, which certainly did not promote a low default risk. The stability that
followed the Vienna Congress in 1815 might have reduced the default risk and, as a
consequence, the interest rate for government borrowing.

10 Dickens et al. [1989] however argue that due to liquidity constraints, moral
hazard by employees who sack workers for no good reasons, legal restrictions on
contracts which means that bonds cannot be easily enforced, and social constraints,
this is not possible.



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