THE COST OF CREDIBILITY: THE COMPANY OF GENERAL FARMS AND FISCAL STAGNATION IN EIGHTEENTH-CENTURY FRANCE

The Company of General Farms, a quasi-private collector of about half the French taxes in the eighteenth century, was one of the largest lenders to the Crown. The relationship between the Crown and General Farms fits the model of sovereign debt as a contingent claim. Lending is sustained in contingent claims models if the lender credibly commits to withhold funds from the sovereign if he defaults. The General Farms maintained this commitment with amonopsony of the Crown's access to taxes and borrowed funds. When revolution threatened, the monopsony stood between the Crown and reform of the fiscal system. The history of the Company of General Farms shows how a contingent claims equilibrium can raise the cost of legitimate reform.