Excerpts from Levy: Of Rule and Revenue

My aim is to demonstrate that the model is consistent with the facts. By choosing a variety of examples, I
also illustrate the power to illuminate diverse historical problems in quite different institutional and cultural
settings (6).

Jensen/Meckeling 1976 PA theory: organizations are a nexus of contracts between Ps and As that specify
the rules of performance evalutation, rewards, and decision rights. The problem is to develop organizational
structures that lead agents to act consistently in the interest of principals. To do this requires technologies
of monitoring and bonding (26).

Example of downward movement from granting to enlisting: rulers tried to motivate agentys by giving them
a fixed income in kind as insusrance against fluctuating yields. Weber: this easily means a first step toward
appropriation of the sources of taxation by the official and their exploitation as private property (31).

Rulers always depend on others for some of the resources necessary to acquire and sustain rule (43)

The model

Rulers maximize revenue subject to the constraints of their relative bargaining power vis--vis agents and
constituents, their transaction costs, and their discount rates (10).

Fiscal contract between ruler and ruled

- Assumptions
o Three types of actors: rulers, constituents, agents
o Rational self-interest
- The Fiscal Contract Taxation is contract-based
o All parties gain (rulers, constituents,[agents]): Contracts are possible because they make all
parties better off (10).
Rulers gain revenue to extend and consolidate their rule
Constituents/ Taxpayers gain the goods, usually collective goods, the state provides
cheaper to them than they could provide privately (e.g. self-defense) (10)
- Two problems of the fiscal contract:
o Negotiating the fiscal contract
o Creating compliance with the fiscal contract

Negotiating the fiscal contract (ch. 2)

- Terms of the fiscal contract depend on

o Relative bargaining power
Rulers will have more bargaining power
the more they control resources on which others depend (coercive,
economic political resources, ) (11, 17), (coordination among constituents)
the more credible their commitment to deliver the goods they promise
under the fiscal contract
ideological leadership (to compensate for lack of material incentives to tax
payers)
 Bargaining power declines as others possess resources the ruler needs of when
they can resist the rulers demand (11)
o Transaction costs (costs of negotiating agreements, measuring revenue sources, monitoring
compliance, using agents, punishing noncompliance)
Decrease by administrative knowledge, experience and info of ruler (12)
Institutional stability and consolidation reduces TCs by reducing the
number of negotiating partners, facilitating their identification and
establishing clear expectations (28)
Increases in demands that the ruler must arbitrate, negotiate and meet (12)
Instability and complexity increases TCs by making it difficult to identify and
negotiate with relevant agents/ constituents (28)
o Discount rates
High discount rates reflect insecurity about the future and intense rivalry (survival
at stake)(13)
Main concern is to extract available revenue with little regard for future
growth and revenue
Low discount rates accompany security of rule (13)
- Rulers preference
o Rulers seek to improve the terms of the fiscal contract in their favor (i.e. improve their
bargaining power, reduce transaction costs, lower discount rates)
- Bargaining power, Transaction costs and discount rates vary in
o Economic development
State of productive forces
Specialization tends to increase the number of economic actors that
require coordination (TCs up), and increases the number of interest groups
that make demands on the state (TCs up, effect on bargaining unclear >
divide and conquer)(35)
Economic structure (productive relations)
Rulers usually have to make concessions to economically powerful actors
(19) > composition of the economically powerful influences structure of
taxation
o International context
Ease of exit to the outside undermines bargaining power(20)
Dependence of constituents on economic challengers from the outside increases
rulers bargaining power
o Form of government

Creating compliance (ch. 3)

- Rulers can reduce the costs of compliance in three ways

o Coercion
Costly in terms of monitoring and enforcement
- Norms and ideological appeals
o What is ideology? The set of individual beliefs and values that modify behavior > the
premium people are prepared to pay for behaving appropriately rather than just rationally
o Ideological compliance is nonstrategic and voluntary (68)
o The effect of ideology is ambiguous
Ideology may reinforce or undermine self-interest
Ideology may reinforce or undermine obligation to comlply
 Failure of rulers to live up to prevailing norms/ ideologies of fairness
undermines compliance (56)
- Quasi-voluntary compliance
o What is it?
an uncoerced willingness to pay taxes based on (1) a belief that rulers will keep
their bargains and (2) the other constituent taxpayers will keep theirs (53)
turns tax compliance into an assurance game (58)
combines on norms (of fairness) but is backed up by material incentives and by
coercion (68)
o How can rulers sustain it?(53)
Increasing confidence in the credibility and their capacity to deliver promised goods
in return for taxes (53)
Rulers can precommit to spend as contracted
o Institutionally: through representative arenas in which they
negotiate and publicly commit to spending plans (61)
o Over time: through repeat interactions and reputation building (62)
Showing that tax payer contributions make a difference in producing desired goods
Ensuring that taxpayers feel that other taxpayers are paying their share
Even if the ideological commitment to the fiscal contract remains
unchanged, quasi-voluntary compliance may decline because people lose
trust that others do their share.

Taxation during the Middle Ages (ch. 5)

- From Feudal to Fiscal contract

- SQ ante: Feudal contract
o Based on mutual obligation between the lord and the liege. Obligations are direct and
clearly defined.
The lord owed protection to the liege
The liege owed support to the lord
o Lords were expected to live of their own resources (royal lands etc.)(99)
- Transition to fiscal contract
o Monarchs lacked the right and the power to impose taxes at will.
Extraordinary taxation required extraordinary consent
o They had to find reasons why those with financial resources should turn them over to the
monarch
Establish a concept of a common good that would justify general taxation( 96)
o War was the obvious candidate because the feudal contract included extra obligations of
the liege in times of war
o
Monarch tried to generalize feudal obligations for war in order to turn this into a
basis for general taxation also in times of peace.
Rulers tried to link war time and peacetime expenses by arguing for
revenues to ensure preparedness and improvement of military technology
(108)
Difficult because the notion of a national realm that needed defense was lacking
until end of 14. Century.
- Difference in Fiscal Contract UK and F
- Structural factors affect bargaining power and transaction costs differently
o Economic and territorial concentration in UK: One trade, one product, one city, one harbor
 Decreases rulers bargaining power > concessions to parliament
Decreases transaction costs:
Institutional centralization of fiscal bargaining in parliament (lower TCs)
Lowers bargaining costs
Lowers cost of reputation building (makes credible commitment easier for
monarch)
Lowers enforcement costs by offering a few easy to monitor tax handles
(taxes on movables and trade)
o Economic and territorial fragmentation in F: decentralized economic diversity and bad
communications
Increases rulers bargaining power> separate fiscal contracts with numerous
regional and local assemblies
Increases the number of taxes in use
Increases agency costs
Monarch depends on tax farmers in order to tax far-away regions
Monitoring of tax farmers is bad
Tax farmers interests are not aligned to monarchs interest in developing tax
sources (rather than overgrazing them).