Rent Extraction through Corrupt Officials - Default Risk and Monitoring Costs∗

Abstract

Beginning in the mid-eighteenth century England started to change its system of raising revenues from tax-farming and the granting of monopolies to direct collection within the government administration. As a result, the English public finances dramatically improved and corruption was reduced both compared to the old system and compared to its major competitor, France. We analyze the reasons for and consequences of this reform in a micro-founded model. In the model, the central authority extracts rents from government officials’ sales of government goods either through up-front payments or through ex-post payments. The cost of government borrowing and the cost of monitoring officials influence which scheme politicians prefer. When borrowing is costly and when monitoring costs are high, up-front payments are relatively attractive. We find that such a system comprises a relatively high level of corruption. The results of the model are consistent with historical facts from England and France. ∗This paper was written in part at Harvard University and in part at Stockholm University. I wish to thank Gregory Clark, Edward Glaeser, Rolf Henriksson, Sten Nyberg, Ilia Rainer, Jean-Laurent Rosenthal, Patrick O’Brien, Sheilagh Ogilvie, Andrei Shleifer, David Strömberg, Jakob Svensson, Jenny Säve-Söderbergh, Johan Söderberg, Francesco Trebbi, Thierry Verdier and seminar participants at Stockholm University, the University of Munich, and at the EEA 2003 Conference in Stockholm for helpful comments. I also wish to thank the members of the EEA 2003 Young Economist Award committee for their support of the paper. †Center for Economic Studies, University of Munich, e-mail: mikael.priks@lmu.de.

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Cite this paper

@inproceedings{Priks2004RentET, title={Rent Extraction through Corrupt Officials - Default Risk and Monitoring Costs∗}, author={Mikael Priks and Rolf Henriksson and Sten Nyberg and Ilia Rainer and J. Wm. Rosenthal and Patrick Karl O’Brien and Sheilagh Ogilvie}, year={2004} }