Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 6

The Roman Empire taxed many faraway provinces. Rome would auction the rights to tax collection to the highest bidder. The winning bidder was given the right to set the tax rate for the province and the right to collect (and keep) the taxes. In turn, the winner would pay the bid amount to the Roman government. Assume (1) that the Roman Senate is interested in maximizing the present value of all future revenues to Rome from auctioning off the tax rights, and (2) that the auction for the rights to each province is conducted annually.
a. Give two reasons why Rome would auction off the rights to tax collection rather than simply send a Roman soldier to collect the taxes.
b. Discuss two problems this system might generate for the Senate.