Rent-seeking with non-identical sharing rules: An equilibrium rescued

Nitzan's (1991) analysis of differential sharing rules in a collective rent-seeking setting is reconsidered. Two groups, each with more than one member, are presumed to use different linear combinations of two sharing rules, one based on an equal-division of the prize, and the other on each member's relative effort. We show that an equilibrium always exists for this type of game, and then characterize the equilibrium. Our result is contrary to Nitzan's claims that (a) in the general case an equilibrium often does not exist, and (b) an equilibrium never exists when the groups use the polar extreme rules.     

Endogenous sharing rules in collective-group rent-seeking

This paper examines the possibility of endogenous determination of intra-group sharing rules in a collective-group rent-seeking game. Collective-group rent-seeking is considered as a two-stage Nash-Cournot game in which sharing rules are determined prior to individual decision on voluntary contribution. The solution is subgame perfect and is obtained by backward induction. In competition between two groups of the same size, the Nash equilibrium sharing rule of each group is to distribute rent to each according to relative effort. Total rent-seeking outlays in this case are equal to those obtained by Tullock (1980). When more than two groups compete for a rent, the sharing rule based on relative effort is again likely to be the Nash equilibrium strategy of each group. The amount of total rent-seeking outlays is also equal to that in Tullock (1980). In a nutshell, the rent is substantially dissipated if sharing rules are endogenously determined.     

Some Implications of Corporate Taxation for Rent-Seeking Activity

In this paper we show that corporate taxes are likely to have considerable implications for rent-seeking activity. We find that corporate taxation tends to significantly reduce rent-seeking, and that it favors rent-seeking by established firms and discriminates against new and zero profit firms. Indeed, we show that corporate tax regulations may completely block rent-seeking by new corporations, and that rent-seeking competitions may be characterized by an equilibrium that features a small number of profitable and well established firms. Tax regulations may therefore impart an oligopolistic tendency to rent-seeking markets. Moreover, our results may have significant implications for the effects of corporate taxes on patent races, tournaments, and other first-past-the-post competitions.     

Rent-seeking in natural resource quota allocations

This paper examines the incentives for rent-seeking in the allocation of natural resource quotas to competing user groups by political bodies. The political body has discretion in making the allocation, and competing user groups rent-seek to influence the allocation. We investigate ways in which the governmental body can affect the behavior of the players by setting the ground rules for the competition. A political body can affect an allocatively (Pareto) efficient outcome by choosing an appropriate default (pre rent-seeking) policy. Surprisingly, an allocatively efficient default policy is unlikely to minimize social costs. However, winner-take-all default policies are likely to maximize, not minimize, rent-seeking. A competitive post-allocation market reduces rent-seeking, but is not, either itself or in combination with an efficient default policy, capable of minimizing social costs. However, forcing winners in political redistributions to fully compensate losers both lowers the rent-seeking levels relative to a potential compensation criterion and, when used together with an efficient default policy, is capable of obtaining the first-best solution of an allocatively efficient allocation with zero rent-seeking.     

Rent-seeking behaviour of retaliating agents

This paper has examined a rent-seeking game where the players take a more sophisticated approach to evaluating the potential strategies and counter-strategies of their rivals than in the standard Nash case. We have derived the conditions for the existence of symmetric and nonsymmetric equilibria for the game and derived the properties of these equilibria. Three results merit repeating. First, we find that rent dissipation will not, in general, be complete. Second, and in contrast to much of the traditional literature, we find that the socially optimal result of zero rent-seeking is sometimes a feasible equilibrium outcome for our game. Finally, there exist rent-seeking configurations in which the best play of one of the rivals is to withdraw from the game or, alternatively stated, where it is not optimal for a rival to contest the rent by entering the game. In these nonsymmetric cases it would appear that Tullock's conjecture about the value of preemptive moves remains valid. This is true even when the strategies and counter-strategies available to the players are much more complex than in the traditional Nash approach.As a final point we raise the issue of whether or not it is reasonable to suppose that the players in rent-seeking games will take their strategy and counter-strategy sets to be as large as we have assumed in this paper. Players may well make their moves and counter-moves based upon rules of thumb or other considerations that effectively bound the strategy sets of the players. As well, it may be useful to consider games where players, upon entering the game, commit themselves to a given level of expenditures. Many of these issues are considered in a related paper by the authors.     

Reexamining efficient rent-seeking in laboratory markets

Given Millner and Pratt's (1989) finding of behavior inconsistent with theory, we reexamine efficient rent-seeking in experimental markets. We show that (a) when r = 3, no Nash equilibrium exists and therefore behavior has no theoretical benchmark to judge consistency, and (b) when r = 1, with a new experimental design utilizing an explicit expected payoff matrix, rent-seeking behavior is consistent with both Nash equilibrium and dissipation hypotheses.The authors gratefully acknowledge the financial support of The John A. Walker College of Business, Appalachian State University. Cliff Nowell provided generous advice. John Willingham supplied valuable research assistance. Michael Pratt and Gordon Tullock provided helpful comments on an earlier version of the paper.     

Interest Group Competition over Policy Outcomes: Dynamics,Strategic Behavior,and Social Costs

This paper analyzes a two-period model of interestgroup competition between two groups to affect thepolicy outcome. The paper characterizes the subgameperfect equilibrium and considers the welfareimplications of the model. The subgame perfectequilibrium to this game is allocatively efficient ifand only if the initial equilibrium is allocativelyefficient and interest groups are equally adept atproducing political pressure. When rent seeking isconstitutionally protected, the notion of rent-seekingconstrained efficiency is defined as the cooperativesolution to the rent-seeking game. It is shown that arent-seeking constrained efficient equilibrium isattainable by forcing winners in political competitionto fully compensate losers.     

Rent-seeking in higher education: Voting on academic requirements

Research on U.S. college athletics suggests that voting on academic eligibility rules is motivated by rent-seeking behavior. Furthermore, academic eligibility rules have been criticized as being racially biased — more blacks than whites fail to meet the requirements. This paper examines whether the potential racial bias impacted voting on a specific academic eligibility rule known as Proposition 42. Evidence of customer discrimination suggests revenue generating differentials between black and white college basketball players. If rent-seeking behavior motivates voting on academic eligibility rules, then the racial composition of recruits and fans may be determinants of Proposition 42 voting. The results show that schools with more black fans were more likely to oppose Proposition 42; however, schools with a larger pool of potential black recruits tended to favor it, perhaps due to a comparative advantage in recruiting black student-athletes.     

Rent-seeking and the two-track price system in China

A simple general equilibrium model is specified to analyse the impact on the Chinese economy of the introduction of a two-track price system on to a centrally-planned economy. It is shown that national income will rise as a result together with a fall in the costs associated with rent-seeking. Some estimates of welfare gains and costs of rent-seeking are provided for seven commodities within a partial equilibrium framework. They are shown to be dependent on the price elasticities of demand and supply. The latter determine the ratio of plan to market prices and the share of plan in total output.     

The debt wish: Rent seeking by business groups and the structure of corporate borrowing in India

Business groups play an important role in emerging economies. The transactions cost perspective, which has dominated our understanding of such groups, argues that the emergence of business groups is a natural response to market failures in developing countries. In this paper, we propose an alternate theoretical perspective – the rent-seeking view – that takes these groups as engaging in coordinated lobbying for the capture of rents created by governments. We develop and implement an empirical strategy to test for the rent-seeking view drawing from the property rights theory of corporate finance. We find strong empirical support for the rent-seeking view using a large cross-sectional data-set of firms in India.     

On the limits to rent-seeking waste

The general equilibrium framework developed in this paper for analyzing the limits to rent-seeking waste goes beyond the existing literature by incorporating tax-financed, public subsidies and rent-protecting activities into a rent-seeking environment. We show that the limits to rent-seeking waste depend on the extent to which government subsidizes rent seekers and rent defenders through tax-financed grants, contracts and favors. As observed by Tullock (1967), the diversion of resources toward efforts to acquire a monopoly rent causes a social waste in addition to the excess burden of monopoly pricing measured by the Harberger triangle. In the absence of government subsidies to rent-seeking and under competitive conditions, this additional waste cannot exceed the maximum monopoly rent attainable. However, if government subsidizes expenditures on rent-seeking, then the additional waste can exceed the Tullock rectangle of monopoly rent and, in the limit, equal the economy's maximum potential social surplus.Rent avoidance expenditures reduce the rent to be captured and thus discourage rent-seeking. If rent avoidance is a relatively efficient mechanism for transferring consumer surplus to rent granters, then rent-seeking expenditures are displaced by less wasteful expenditures on rent defending. As a result, under competitive conditions, unsubsidized demand for private rent protection may be socially efficient. Nonetheless, the upper limit to rent-seeking waste depends on constitutionally determined maximum rates of public subsidies to rent-seeking and rent-avoidance activities.     

Rent-seeking and optimal regulation in replenishable resource industries

In this paper, wasteful rent-seeking behaviour has been shown to have important implications for the determination of the welfare maximizing regulatory policies of replenishable natural resource industries. In general, the incorporation of wasteful rent-seeking activity into the analysis leads to policies which suggest a greater level of industry output than has been advocated by tradition policies that do not take rent-seeking into account. Our analysis therefore supports a more laissez faire policy than has been recommended in the literature.Specifically, we find that when rents are completely dissipated by wasteful rent-seeking activity (t = 1), the role of the regulator is simply to guarantee biological efficiency, should this be threatened by the economic equilibrium achieved by the free-access of firms. One of two possibilities can occur. In the first, the economic equilibrium determined by the free-access of firms is biologically efficient, i.e., the equilibrium steady state of the replenishable natural resource exceeds or is equal to the maximum sustainable yield stock size (x _MSY). If this occurs, the regulator needs to take no action whatsoever. In the second case, the economic equilibrium generated by the free-access of firms does not yield biological efficiency. The equilibrium is characterized by a steady state stock of the natural resource that is smaller that the maximum sustainable yield stock size, namely (x _MSY <>x _MSY). In this case, therefore, the regulator does need to intervene, but his best policy takes the simple form of setting the total quota equal to the maximum sustainable yield (MSY) of the resource. Thus, while the results are to some extent consistent to those derived by Buchanan for the regulation of externalities, the fact that we are dealing here with replenishable resources adds a further dimension to the issue and changes some of the policy implications.     

Risk aversion in two-period rent-seeking games

This work analyzes a two-period rent-seeking game, with the aim of studying the effect of risk aversion on the optimal choices made by the rent-seekers. We first prove that the equilibrium in two-period rent-seeking games always is unique. The analysis also shows that more risk aversion reduces the investment in the rent-seeking game in a two-period framework without introducing the additional condition of prudence, required in one-period models. Similarly, the introduction of a risky rent, instead of a given rent, implies, in the two-period framework, a reduction in investment under the condition that the rent-seekers are risk averse. Moreover, with risk aversion, larger first-period wealth increases investment in the rent-seeking game and larger second-period wealth reduces it. When both first-period and second-period wealth increase, investment in the rent-seeking game declines if the rent-seeker is risk averse and imprudent. Lastly, when a risky level of second-period wealth is introduced, the rent-seeker increases (reduces) investment in the rent-seeking game if he is risk averse and prudent (imprudent).

     

How organizational structure can reduce rent-seeking

In multi-tiered organizations, individuals can engage in unproductive rent-seeking activities both within and between the divisions of the organization. Nevertheless, a multi-tiered organizational structure can induce efficiency gains by decreasing rent-seeking. We present a model of production and simultaneous internal and external rent-seeking, assuming a logistic contest success function. In equilibrium, there is generically either internal or external rent-seeking, but not both. A multi-tiered organization leads to less rent-seeking and higher welfare, even though the production technology gives no reason for any specific organizational structure. Our findings constitute a new efficiency rationale for multi-tiered organizations.     

Bequests, sibling rivalry, and rent seeking

We examine bequest-sharing rules where sibling rivalry creates wasteful competition for intergenerational transfers. We show that equal division of bequests minimizes rent-seeking expenditures by siblings while primogeniture maximizes rent-seeking costs. Our results lend theoretical support to the empirical findings of equal bequests without appeal to complex models of the parent-child relationship.     

Litigation and legal evolution: does procedure matter?

Gordon Tullock’s critique of the common law runs against much of the conventional wisdom in the law and economics literature. In this paper we revisit one of the most controversial aspects of Tullock’s critique. By applying Tullock’s own model of rent-seeking to litigation, we study the effect of alternative procedural rules on civil litigation. Our results provide support for Tullock’s controversial critique of the common law, revealing an evolutionary bias in the production of legal rules by courts. We extend the standard litigation model to study the effects of alternative procedural systems on the evolution of the common law.     

A comparison of rent-seeking models and economic models of conflict

This paper provides a comparative analysis of the basic rent-seeking model and a simple economic model of conflict. Each model is concerned with a game in which players invest resources in pursuit of a prize. The purpose of the analysis is to elucidate structural differences between the two models, and to analyse the consequent behavioral differences and equilibrium outcomes in the two cases. A key finding is that, where such comparisons are possible, the conflict model tends to involve greater relative expenditure on wealth-redistribution activities than does the rent-seeking model.     

Rent-seeking,political influence and inequality: A simple analytical example

A simple model allowing an analysis of the interaction between economic policy decisions and rent-seeking by private agents competing for political influence, is developed. Rent-seeking may be of the directly unproductive type, requiring resources that are withdrawn from productive activities, or it may manifest itself as income transfers (corruption) to political decisionmakers. In the political-economic equilibrium of the model the extent of rent-seeking, economic policy decisions, income inequality, etc. are endogenously determined.     

The solution to the Tullock rent-seeking game when R>2: Mixed-strategy equilibria and mean dissipation rates

In Tullock's rent-seeking model, the probability a player wins the game depends on expenditures raised to the power R. We show that a symmetric mixed-strategy Nash equilibrium exists when R>2, and that overdissipation of rents does not arise in any Nash equilibrium. We derive a tight lower bound on the level of rent dissipation that arises in a symmetric equilibrium when the strategy space is discrete, and show that full rent dissipation occurs when the strategy space is continuous. Our results are shown to be consistent with recent experimental evidence on the dissipation of rents.     

Privately informed seekers of an uncertain rent

Two departures from antecedent rent-seeking models are invoked: a rent of unknown size is sought, and rent seekers obtain private imperfect estimates of this size. A symmetric equilibrium for a fixed number of rent seekers is characterized, and shown to underdissipate the rent. Then a model of the decision to obtain private information and participate in the rent-seeking contest is built. The symmetric equilibrium participation probability equates expected profit to participation costs. A simple formula for underdissipation results: dissipation is incomplete precisely by the expected aggregate participation costs. If an award mechanism can attain a lower level of dissipation for a fixed number of seekers, then it will raise the endogenous probability of participation, and as a result will dissipate less rent in the equilibrium with an endogenous number of seekers.