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



The outline of the paper is as follows. In Section II we present
historical evidence from England and France on monitoring costs and
default risk. The theoretical analysis, which takes its starting point in
Shleifer and Vishny [1993], is presented in Section III.12 In Section IV,
we allow for the possibility that agents, in addition to investors, may
have been subject to the monarchs’ inability to credibly commit to their
decisions. Conclusions are offered in Section V.

II. Historical Evidence on Monitoring Costs
and Default Risk in England and France After
the Civil War

It is a well known fact that the cost of monitoring officials was reduced
in the seventeenth century in England to a level which was lower than
the one in France [Chandaman 1978, Ekelund and Tollison 1981, Brewer
1988 and Kiser and Kane 2001].

A reason for this difference may be the “remarkable” growth of Eng-
lish urbanism from the mid-seventeenth century [Brewer 1988, p. 180].13
When people work for companies in cities, commercial record-keeping
within the government administration is more efficient than if people
has an encompassing interest, which has a positive effect on economic performance.

12 Similar to Shleifer and Vishny [1993], an agent sells government goods and he
may or may not report the sale to the central authority. In our model, the central
authority also uses the agent to extract rents for its own purposes through up-front
versus ex-post collection. An additional difference is that we introduce the cost of
monitoring the agent and the default risk.

13 Between 1600 and 1750, the number of English towns with populations between
5 000 and 10 000 doubled, while in continental Europe the total of such towns fell
[Brewer 1988]. In 1700, the percentage of people living in cities of at least 10 000
habitants was 13.3 in England and Wales and 9.2 in France. In 1750, the percentage
was 16.7 for England and Wales and 9.1 for France [De Vries 1984].



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