The role of implicit contracts: Building public works in the 1840s in Portugal

Abstract

This article studies financial schemes for building public works in the 1840s. The study of the Portuguese case clearly illustrates the importance of implicit contracts with governments in peripheral Europe, shedding light on solutions for financing the provision of public goods. Building roads and railways seems to have been the fruit of an implicit contract behind the tobacco monopoly in a country involved in social turmoil and civil wars. Reputation effects are called to explain the relevant range of the partners' negotiations, to reject the traditional historiography based on wrong management and speculation in a period of savage capitalism.

Keywords:

• financing public goods
• feasibility of self-enforcement contracts
• implicit contracts
• bargaining
• business in nineteenth-century peripheral Europe

Notes

 1. A law of 23 July 1843 declared the government policy of building a vast network of roads throughout the country to serve that goal.

 2. Sourced in the Historical Archives of the Portuguese Central Bank (Banco de Portugal).

 3. With statutes that were approved by law on 30 December 1844.

 4. As public bonds had a low market price, they were accepted at 56% and 68.5% of their nominal value, for 4% interest rate bonds and 5% interest bonds, respectively.

 5. Deputee and member of the Portuguese Academy of Science.

 6. The case of Mexico is very clear (see Connolly, 1999).

 7. Studies on work contracts may benefit from labour economics (see Conway & Breiner, 2005; Medof, 1981).

 8. A fiscal year began on 1 July and ended on the following 30 June.

 9. The price of tolls varied between about 0.88 shillings (2 réis) for each animal and 0.73 shillings (165 réis) for each carriage drawn by four beasts or for the use of any first-class bridge. Pedestrians would pay about 2.2 shillings (5 réis).

10. According to the law of 26 July 1843.

11. According to article 30 of the contract celebrated between the Company and the government. The details on the reception of these amounts of money collected by the government were established in the official notice Diário do Governo of 18 Oct. 1845. Historical Archive of the Bank of Portugal.

12. The subscribed capital provided the Company with only £161,333.

13. Facing the Largo do Pelourinho and Rua do Arsenal, and still exists.

14. For reasons related to special public works on the banks of the Alfeizerão River a special agent was created in the neighbouring village of Sanguinhal, near Bombarral.

15. The labour regime was legally defined by the bulletin of 21 June 1845. Historical Archive of the Bank of Portugal.

16. The daily wage for male adults was established at 7 shillings ($160).

17. Letters to the regional political authorities from the Board of Directors. Historical Archive of the Bank of Portugal.

18. José Luís Vítor Du Pré and Eugénio José de Gayffier. Historical Archives of the Portuguese Central Bank (Banco de Portugal).

19. Gregório António Pereira de Sousa, the first, and António Lopes Pereira Nunes, Francisco Inácio Mendes and Francisco Isidoro Lino de Moura. Historical Archives of the Portuguese Central Bank (Banco de Portugal).

20. All of their names are preserved in street names in the city of Lisbon.

21. The Count De Claranges Lucotte had a similar contract from the central state, for the Oporto–Braga, Braga–Guimarães, Guimarães–Oporto and Vila Nova de Famalicão–Viana roads. This first contract was cancelled and gave way to a new one, this time with the Public Works Company, to which the central state transferred this commitment. The substitution of the contract led to the payment of an indemnity of £21,333 to the Count De Claranges Lucotte. P. Lombré & Company obtained a similar sub-contract for building the Lisbon–Oporto and Carregado–Caldas roads. Historical Archives of the Portuguese Central Bank (Banco de Portugal).

22. De Claranges Lucotte, Figueiredo Pérry & Company, and João Leite de Faria. Historical Archives of the Portuguese Central Bank (Banco de Portugal).

23. According to Mata (1993), the expenditures of the Company amounted to £8,000 and revenues to about £19,111, providing a final profit of about £11,000.

24. £5,777 and not £11,555. Ibid.

25. Promulgated on 31 January 1846.

26. £25,111 and £185,555, respectively.

27. This occurs even with symmetric information (Salanié, 1994).

28. The Company's ledger records the devolution of an agreed guarantee that a sub-contractor had deposited in consequence of the decision of the Company to desist.

29. The liquidation of the Company was regulated in two decrees, one of 7 November 1849, the other of 15 May 1850.