The Perils of Privatization

Abstract

Almost all premodern states and empires used privatized tax collection. Roman history is a good research site for the study of tax farming because it provides ample variation on its extent and effectiveness while controlling for many other factors. Tax farming began in the early Republic, was expanded but became more exploitative in the late Republic, and then was abolished for some types of taxes and was more centrally controlled for others in the Empire. We use a sociological version of agency theory to explain these changes. In addition to well-known causes of the use and effectiveness of tax farming, such as the size of the empire, the level of development of communications technologies, and the type of tax collected, we show that a major determinant in the Roman case was the characteristics of principals, a function of the form of the state. Differences between the Republic and the Empire can be traced to differences between the senate, which ruled in the former, and the emperors, who ruled in the latter. The perils of privatization in the late Republic were mainly caused by characteristics of the principals, especially the fact that the Roman senate was a multiple principal with a “revolving-door” relationship with the agents it was supposed to control, and were exacerbated by direct senatorial investment in tax farms.