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

to shirk. White [2004] takes the stand that, in line with the principal-
agent problem of share cropping [Stiglitz 1974], French tax farmers were
used to absorb risk. Moreover, White [2004] argues, without providing a
formal model, that the monarchs’ monitoring costs and access to credit
markets help to explain variations in the French fiscal system in the
eighteenth century. Similar to Toma and Toma [1992] and White [2004]
we argue that tax farmers are used to avoid monitoring costs, but in
our model this system is unattractive due to inefficiencies in the auction
mechanism. Johnson [2003] finally shows that tax farmers were used
in France because they could make the investments necessary to collect
taxes at a lower cost than the monarch could and because they worked
as financial intermediaries. While Johnson focuses only on France, and
on the reasons for a change in the French auction system, we study
both how changes in monitoring costs and default risks affected the
developments of the fiscal systems in England and in France as well as
their distributional consequences. In contrast to Johnson, we also model
the interaction between the central authority and the tax-collector with
regard to monitoring and theft.

More generally, the paper relates to the incomplete contract litera-
ture, which studies whether a government should provide a service in-
house and when it should outsource the provision (see e.g. Laffont and
Tirole 1993, Schmidt 1996 and Hart et al. 1997).¹¹

¹¹ Other theories explaining the different development in England and France is e.g.
North [1981] who argues that the difference between England and France was that
English parliamentarians, in their capacity as businessmen, benefited from developing
property rights. North and Weingast [1989] and later Finer [1997] instead argue that
the English system of divided power (between the parliament, the crown and common
law) was more efficient than the system of concentrated power in France. This
argument, however, is inconsistent with Olson’s [1993] view that a secure autocrat

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