Illegal markets and the social costs of rent-seeking

This paper argues that making goods or services illegal results in an increase in the social costs associated with rent-seeking. The increased social cost is in the form of negative externalities that result from market participants use of coercion and violence in attempts to control trade in the illegal good. Consequently, the social costs of rent-seeking will exceed the value of resources dissipated in rent-seeking competition. And, where the external costs exceed the undissipated portion of the Tullock cost, the social cost of rent-seeking is greater than the sum of Tullock and Harberger costs.     

Toward the usable recognition of individual benefits and costs in regulatory analysis and governance

Regulatory agencies in the United States and Europe have well‐deserved reputations for fixating on the total benefits and costs of proposed and final regulatory actions, without doing any more than anecdotally mentioning the subpopulations and individuals who may bear disproportionate costs or reap disproportionate benefits. This is especially true on the “cost” side of the cost–benefit ledger, where analysts exert little effort to even inform decisionmakers and the public that the costs of regulations might be distributed either regressively or progressively. Many scholars and advocates have observed that regulation can increase the efficiency of market outcomes, but caution about its untoward (or suboptimal) effects on equity. Here, we argue that without considering distributional information about costs and benefits, regulatory policies in fact can also cause violence to notions of efficiency, for two reasons: (i) society cannot hope to approach Pareto‐efficient outcomes without identifying those who must lose so that others can gain more; and (ii) because the harm experienced by involuntary risks and by imposed regulatory costs is likely non‐linear in its magnitude (at the individual level), efficiency is, in fact, a strong function of the shape of the distribution of these effects. This article reviews evidence about the distribution of regulatory costs and benefits, describes how agencies fail to incorporate readily available distributional information, and sketches a vision for how they could analyze costs and benefits to promote more efficient regulatory choices and outcomes.     

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.     

Improper Selection of High-Cost Producers in the Rent-Seeking Contest

The resources two rival businesses spend to raise their own chanceof getting a unique monopoly license are a cost of rent-seeking.When those businesses differ in the costs of producing themonopoly good there is an additional cost of rent-seeking that hasnot been sufficiently studied in the literature. If the high cost producer winsthe license, the difference between his cost and the costs of hismore efficient rival is a social loss from improper selection ofproducers by the political process. The loss becomes more severewhen the ability to lobby of the inefficient producer outstripsthat of the efficient producer. This may help to explain whyspecialized lobbying evolved. Specialized lobbying reduces thesocial cost from improper selection of firms by allowing efficientproducers to hire expert rent-seekers and so to raise theirchances of gaining monopoly concessions.     

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.     

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).

     

X-efficiency,rent-seeking and social costs

This paper investigates shifts in cost functions of monopoly and regulated firms operating under conditions of X-inefficiency and rent-seeking behavior. We show that X-inefficiency and rent seeking have significantly different implications for economic welfare. Distinctions are drawn between pecuniary and real X-inefficiency and between sunk and continuing rent-seeking costs. In general, for a given cost shift rent-seeking behavior implies larger social costs than does X-inefficiency theory. However, cost shifts caused by either X-inefficiency or rent seeking are observationally equivalent. This implies empirically measured cost shifts cannot unambiguously be attributed to either cause.     

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.     

Rent-seeking in the classroom and textbooks: Where are we after 50 years?

In this paper, we provide an overview of the influence of Tullock’s work on rent-seeking in the area of economics education. After summarizing the basic rent-seeking model in both a domestic and international context, we conduct an analysis of undergraduate and graduate textbooks in public economics. We find a majority of undergraduate texts cover rent-seeking in depth, but two texts provide zero coverage. No graduate textbook surveyed mentions rent-seeking. We conclude by summarizing the economic education literature on rent-seeking, which can be divided into either classroom experiments or popular culture examples.

     

Business–Regulatory Relations: Learning to Play Regulatory Games in European Utility Markets

Although regulation is on the rise in the European Union, the liberalization of the telecommunication and energy markets has not created a uniform European Regulatory model. The principle focus of this article is to examine the interaction and regulatory learning between national regulatory authorities and business in the U.K. and German utility markets to assess the degree of convergence and demonstrate how the regulatory relationship has evolved beyond that envisaged in the initial delegation of powers to the regulator. The article shows that independent regulatory authorities have moved from distant and often confrontational relationships with business to strategic working relationships driven by exchanges of information and reputation building and that regulatory learning and trust have evolved at distinct speeds in sectors and countries depending on the number of regulatory authorities in a market place, the degree to which there are concurrent powers between authorities, their discretion in the consultation process, and the length of time that regulatory authorities had existed. Consequently, significant variance is continuously seen in the business—regulator relationships in comparing the young legalist German regulatory authorities with the established independent and discretion-based regulators in the U.K.     

Rent-seeking and the behavior of regulators: An empirical analysis

The main contribution of this paper is to describe empirically how the rent-seeking process takes place in a regulated industry through the consistency in Board decisions. Evidence provided by discrete-choice decision models of regulators confirms that the conventional rent-seeking view of regulation is correct, namely to distribute wealth between various groups differently from what market forces would do. First of all, the structure of the rent-seeking activities in the Quebec regulated trucking industry is well explained. There exist behavioral uniformities (Russell and Shelton, 1974) in decisions taken by the Quebec Transport Commission, given its wide range of choice provided by the absence of detailed regulatory standards by the Quebec legislature. Secondly, trucking firms and large shippers are the interest groups seeking to extract artificially contrived rents. The capture theory of regulation is not a dominant political strategy and therefore does not analytically explain various trades taking place among interest groups when a permit authority is requested. So logrolling by regulators is clearly essential to maintain their non-transferable investment of time and talent and protect their political afterlife. Thirdly, large firms are more successful, at the margin, than small firms in their expansion because of their political effectiveness. The regulatory agency gives more rents to those who offer relatively strong electoral support to its party. Finally, appointed regulators do not achieve other positive payoffs from the regulatory process than those which may result from the agency problem. So the regulatory agency does not promote its own policy agenda, but rather that of the elected politicians, given the organizational and control problem between these two.I am indebted to the Social Sciences and Humanities Research Council of Canada for its financial support, to Gérard Bélanger, Jean-Luc Migué for helpful comments and to Sylvain Veillette, Pascal Migué, Marc Leduc for valuable research assistance. I benefitted from useful comments by the editor of this journal. All the remaining errors are mine.     

A Bonfire of the Regulations,or Business as Usual? The UK Labour Market and the Political Economy of Brexit

Employment and labour market regulation initially appeared as one of the solid red lines in the UK's renegotiation of the country's place in the EU. The basic argument is that the UK's more deregulated labour market would sit uneasily in the more organised models, based on statutory instruments or collective bargaining, found on the continent. While there is a legitimate problem here, EU employment regulations appear manageable from the point of view of business, while unions see them as important tools for socially responsible economic restructuring. Most of UK employment case law is now deeply entangled with EU law; labour market regulations have, on the whole, become part of the way of doing business in the Single Market; and a simple cost–benefit analysis appears impossible because some costs are not quantifiable and the costs of others are reduced when taken as a bundle. Labour unions agree that transposition of European law needs to be done taking into account local sensitivities, while internationally oriented companies do not see EU regulations on the whole as detrimental to business. Importantly, though, the costs and benefits of EU employment regulations are not symmetrically distributed across different companies: large companies are better able to reap the rewards and accommodate the costs of operating in the Single Market than smaller companies.     

The design of rent-seeking competitions: Committees,preliminary and final contests

The paper examines the common practice in multi-contest rent- seeking competitions, where “finalists” are selected, based on rent-seekers' efforts in a preliminary contest. We find that for any single-contest design, rent-seeking expenditures could be reduced by introducing a preliminary contest, if the marginal returns to rent- seeking effort in the preliminary contest is sufficiently low. In addition to other reasons, the paper argues that this may explain why such multi-contest designs are common. We argue that rent-seeking expenditure in the preliminary stage represents the cost of reducing the number of contestants. We also find that the practice of setting a higher “quality” standard in the final contest than the “quality” standard in the preliminary contest reduces rent-seeking waste. We derive an expression for the optimal number of finalists; under certain conditions we find that the optimal number of finalists is directly proportional or equal to the square root of the number of potential contestants. Finally, we show that whether rent-seeking expenditures rise or fall when the rent is awarded by a committee instead of a single administrator depends on the sensitivity of the committee relative to that of the single administrator.     

Compliance costs,regulation, and environmental performance: Controlling truck emissions in the US

When explaining regulatory policymaking and the behavior of regulated business firms, scholars have supplemented economic models by emphasizing the role of public‐regarding entrepreneurial politics and of normative pressures on firms. This article explores the limits of such entrepreneurial politics and “social license” pressures by examining regulation of emissions from diesel powered trucks in the US. We find that the economic cost of obtaining the best available control technology – new model lower emissions engines – has: (i) limited the stringency and coerciveness of direct regulation of vehicle owners and operators; (ii) dwarfed the reach and effectiveness of the governmental programs that subsidize the purchase of new less polluting vehicles; and (iii) elevated the importance of each company’s “economic license”– as opposed to its “social license”– in shaping its environmental performance. The prominence of this “regulatory compliance cost” variable in shaping both regulation and firm behavior, we conclude, is likely to recur in highly competitive markets, like trucking, that include many small firms that cannot readily either afford or pass on the cost of best available compliance technologies.     

Unions and Market Integration in Contests

In this paper, we study the effects of introducing endogenous costs in aTullock model of rent-seeking. We show that unions can be efficiencyimproving, and that the firms' levels of effort depend more critically uponthe number of firms participating in the contest when unions are present. Wethen study the effects of market integration in a two-country setup.Integrating two initially separate markets is shown to decrease union setwages, but is nevertheless beneficial to firms of both countries only if thereare sufficiently few contestants. However, unions and firms in one countrymight benefit from integration if their resident country is sufficiently largecompared to the post-integration market.     

Governance and transnational civil society: the problem of transnational rent-seeking

The expansion of transnational civil society challenges the regulatory reach of nation-states, both individually and collectively. One regulatory challenge is that transnational civil society organizations (TCSOs) can avail of opportunities to engage in, or facilitate, transnational rent-seeking in ways which benefit a small group of organizations or individuals but which impose significant social costs. This article suggests that certain roles played by TCSOs lend themselves to rent-seeking behaviour and it explores the hypothesis that TCSOs can engage in, or facilitate, transnational rent-seeking where they constitute transnational special interests and/or private transnational authorities. To this end, the article outlines a brief theoretical framework and applies it to case studies of two TCSOs, representing transnational trade associations and industry lobbies, and sports associations and regulators. While the conclusions here are tentative, the article argues for further research including refinement of the theoretical framework and empirical testing.     

Economic discourse and the capitalist order

This paper uses the concepts of business model and financial ecosystem to analyse the relation between the US capital market and corporate business. Under a capital market double standard, from 1995 to 2000, new companies with digital prospects could recover their costs from the capital market; but, after the tech stock crash in 2000, all companies were required to generate profits from the product market. This encourages a blurring of old and new firm identities, because sectoral power is increasingly necessary to secure cost recovery. But this does not imply any return to business as usual when the financial ecosystem for new technology survives the crash and large-scale venture capital investment continues. From this point of view,the new economy illustrated, concretely, the determining role of finance in the broader processes of financialization.     

The optimal subsidization of Baptists by bootleggers

Rent-seeking bootleggers have an incentive to subsidize the lobbying activities of the public-interest minded Baptists. We demonstrate that unless a certain set of conditions hold, the optimal subsidy will be positive and will provide a moral smoke screen for rent-seeking activities. Consequently, it will be extremely difficult to identify the actual level of rent-seeking from the public interest activities. Therefore, current empirical estimates may well underestimate the actual level of rent-seeking in the regulatory arena.I am indebted to Garey Durden for several enlightening discussions on rent-seeking and regulation and helpful comments on an earlier version of this paper.     

Government-to-Government Contracting: Stewardship,Agency, and Substitution

ABSTRACT

This paper provides empirical evidence detailing the distinctive nature of service delivery provided through contracts with other governments. The results of a survey of Ohio city and county managers both confirm and stand in contrast to implications derived from stewardship theory. Consistent with stewardship, our data demonstrate that contracts with public sector service partners generate less intensive monitoring by contracting governments than do services contracted with private entities. In contrast to stewardship theory, we find that contracting governments do not use other governments for services requiring intensive monitoring. In an era of accountability and results-oriented management, reliance on trust may not satisfy constituents who seek evidence of effective service delivery. The inability of the contracting government to affect another government's service delivery reduces the attractiveness of that government as a contracting partner. If the tools of stewardship prove to be inadequate, the imposition of carrots and sticks appropriate for a principal-agent relationship could undermine the trust central to stewardship. Given these tensions, it is not surprising that governments are contracting less with other governments.     

From subjectivism to constitutionalism: the intellectual journey of James M. Buchanan through his Italian heroes

Quack medicines were prepackaged, commercially marketed medicinal concoctions brewed from “secret recipes” that often contained powerful drugs. Governmental regulation of them in late nineteenth-century England is heralded as a landmark of public health policy. We argue that it’s instead a landmark of medicinal rent-seeking. We develop a theory of quack medicine regulation in Victorian England according to which health professionals faced growing competition from close substitutes: quack medicine vendors. To protect their rents, health professionals organized, lobbied, and won laws granting them a monopoly over the sale of “poisonous” medicaments, most notably, quack medicines.