Influencing rent-seeking contests

This paper shows that a policy that uniformly increases contestants’ effort costs can lead to an increase in total effort. In asymmetric settings, this “levels the playing field” and therefore encourages weaker players (who otherwise would have stayed out) to enter. Paradoxically, a contest designer whose only objective is to maximize total effort may thus wish to make rent-seeking “more difficult.” These results suggest that the often-lamented bureaucratic red tape might in fact be a rational response to the problem of attracting lobbyists to participate in a contest.     

The incidence of overdissipation in rent-seeking contests

Tullock's analysis of rent seeking and overdissipation is reconsidered. We show that, while equilibrium strategies do not permit overdissipation in expectation, for particular realizations of players' mixed strategies the total amount spent competing for rents can exceed the value of the prize. We also show that the cross-sectional incidence of overdissipation in the perfectly discriminating contest ranges from 0.50 to 0.44 as the number of players increases from two to infinity. Thus, even though the original analysis of overdissipation is flawed, there are instances in which rent-seekers spend more than the prize is worth.     

The strategic advantage of interdependent preferences in rent-seeking contests

We study rent-seeking contests, where the set of players contains two groups of players – one with independent preferences and the other with (negatively) interdependent preferences. It turns out that the latter experience a strategic advantage in general two-player contests and in n-player-contests with non-increasing marginal efficiency. For general n-player contests with increasing marginal efficiency, the strategic advantage prevails provIDed convexity of contest technologies is sufficiently weak. For strongly convex contest technologies, other types of equilibria exist, including one where indivIDualists receive strictly higher pay-off.     

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.     

On the formation of alliances in conflict and contests

This paper examines the problem of the formation of alliances in conflict and, more generally, in contests with three players. Each player possesses an exogenous strategic endowment (e.g., arms, efforts, rent-seeking activity). The outcome of contests, including those between any alliances of players, is governed by a Contest Success Function (CSF). In the three-person/one-cake problem an alliance between two players against the third one will form if and only if the CSF has an increasing returns characteristic. When an alliance forms, there is a tendency to be formed by the weaker players against the strongest player. Similar tendencies exist in other three-person problems that I examine.     

Measuring rent-seeking

Public Choice - Some 30 years ago Gordon Tullock, in his capacity as Editor of Public Choice, made a pointed effort to motivate researchers to measure and quantify resource investments in...     

Cooperative rent-seeking

The paper introduces a concept of “efficiency set” in the context of group decisions and analyses its properties. If the set contains a single element, then the Borda rule finds it. Otherwise, the group needs a value function to choose from the efficient alternatives. Two value functions, with considerations for the number of participants who are badly affected by the choice, have been discussed. It turns out that the consistency axiom of group choice imposes a constraint, on the form of the value function, with questionable normative significance.     

Stackelberg rent-seeking

In this paper I present a formal analysis of rent-seeking games in which the players do not move simultaneously. I consider rent-seeking situations where the players are risk neutral and may value the prize differently. The subgame perfect equilibrium outcome in this Stackelberg game provides several surprising and interesting results. I extend the problem to deal with cases of incomplete information concerning the value a player has for the politically contestable rent.     

Foreclosure in contests

We consider a contest where one firm has a cost advantage over rivals. Instead of taking the set of rivals as given, the favorite can transfer the source of its advantage wholly or partially to a subset of rival firms. Foreclosure of those firms that do not receive the cost reduction may result. We present conditions under which this transfer will occur and consider the welfare properties of exclusion. The expected payoff of the dominant firm is independent of the size of the cost reduction transferred to rivals. Applications include lobbying, patent races and access to essential infrastructure.     

Outsourcing in contests

We study ex post outsourcing of production in an imperfectly discriminating contest, interpreted here as a research tournament or a procurement contest for being awarded some production contract. We find that the possibility of outsourcing increases competition between the contestants, leading to higher total contest effort, if the contest winner is expected to obtain a sufficiently large share of ex post outsourcing rents. Under reasonable assumptions, outsourcing tends also to increase the number of active contestants, strengthening the case for outsourcing to increase total contest effort. If such effort is socially wasteful, outsourcing creates a welfare trade-off between ex ante and ex post efficiency.     

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).

     

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.     

Cultural institutions and value formation on the art market: A rent-seeking approach

The formation of value in the artistic market can be specifically affected by the behavior of cultural institutions, acting on it as monopolistic quality certifiers. The rent-maximizing strategy limits quantities to sub-optimum levels and keeps prices and costs higher. This can be worsened by institutional rent-seeking. The establishment's strategies cannot always be matched through public policies, because this can result in an increase of monopoly social losses and of the establishment's lobbying efforts.     

Winner-pay contests

We analyze winner-pay contests in which players select bids, the winner is determined probabilistically through a contest success function, and only the winner must pay her bid. We show that a pure-strategy Nash equilibrium exists and is unique under weak assumptions on the contest success function. We determine the Nash equilibrium for several examples. We also consider how equilibrium bids are influenced by private information about the value of winning the contest.     

Efforts in two-sided contests

The degree of rent dissipation is studied in extended two-sided contests that involve two types of efforts. While usual contestants expend resources in trying to win the contested prize, potential recipients of the rent-seeking efforts also participate in the contest. This is due to uncertainty regarding the source of power in the contest that induces the bureaucrats to expend resources to increase their share in the rent-seeking efforts by trying to appear as the party controlling the allocation of the prize. We show that the existing theoretical and empirical studies are incomplete and may underestimate the extent of rent dissipation.     

Biased contests

We examine the effects of providing more accurate information to a political decision-maker lobbied by competing interests. We investigate how this bias in the direction of the correct decision affects efficiency, measured (inversely) by both the probability of taking an incorrect decision, and the amount of social waste associated to lobbying activities. We present a benchmark model in which increasing the bias always improves efficiency. However, this result is fragile as slight changes in the contest success function lead to slightly different models in which under either criterion there is no guarantee that more accurate information improves the decision.     

A multi-winner nested rent-seeking contest

Public Choice - This paper considers a symmetric imperfectly discriminating rent-seeking contest in which there may be several winners. We first demonstrate a serious flaw in previous work and then...     

Crowding-out in productive and redistributive rent-seeking

This paper presents a general rent-seeking model in which participants decide on entry before choosing their levels of efforts. The conventional wisdom in the rent-seeking literature suggests that the rent dissipation increases with the number of potential participants and with their productivity of effort. In this paper, we show that this result of the rent-seeking literature is far from general and applies only when participants are relatively weak and enter the game with certainty. In the presence of strong competitors, the expected total dissipation actually decreases, since participation in the game is less frequent. We further consider the impact of competitors’ exit option, distinguishing between “redistributive rent-seeking” and “productive rent-seeking” situations. In redistributive rent-seeking, no social loss results from the fact that all competitors exit the race. In productive rent-seeking, instead, lack of participation creates a social loss (the “lost treasure” effect), since valuable rents are left unexploited. We show that the lost-treasure effect perfectly counterbalances the reduction in rent dissipation due to competitors’ exit. Hence, unlike redistributive rent-seeking, in productive rent-seeking the total social loss remains equal to the entire rent even when parties grow stronger or the number of players increases.