Soft budgets and hard rents: a note on Kornai and Gomulka

This note shows how Kornai's concept of the soft budget constraint can be decomposed into separate elements of technical inefficiency and relative price distortion. The distinction between r-budget softness and m-budget softness introduced by Gomulka is shown to correspond to the equivalent and compensating variation measures of efficiency loss. It is also argued that budget softness should be viewed as the outcome of a rent-seeking process in which a firm's action in the control sphere incurs an opportunity cost in the real sphere. Adopting such a perspective leads to a re-definition of the resource loss associated with budget softness and results in much higher estimates of the social costs of soft budgets than those proposed in the existing literature.     

An Expansion of the Neoclassical Horizon in Economics: The Rent–Seeking Research Program Brings in the Nuances of Social and Political Control

Abstract . The terms of discourse in the Neoclassical school of economic theory have constrained its ability to develop the connections between the economic and the social and political spheres. Building on the logic of the rent–seeking research program a systematic connection is developed. A taxonomy of distribution is presented in which rent and profit ate identified as distributions to control over productive factors. The structure of control embodied in social and political institutions largely determines who controls these productive factors and therefore who receives the distributions to control: profit and rent. The distinction between profit and rent relates to opportunity cost. Profit is a distribution to control equal to opportunity cost and is therefore allocatively necessary. Rent is a return above and beyond opportunity cost and is not allocatively necessary. By clarifying the role of rent and profit in Neoclassical theory the interconnection between the social, political, and economic spheres is systematically integrated into the theory.     

Risk,rent seeking and the social cost of monopoly power

Some recent empirical studies that have estimated the social cost of monopoly power have included in these estimates observed monopoly rents as a proxy for the unobserved value of the resources expended by rent seekers. This has involved adding these estimates of resources wasted by rent seekers to estimates of deadweight welfare loss triangles so as to produce an overall estimate of the social cost of monopoly. The present paper points out that each firm seeking a monopoly rent flow not only may be uncertain about obtaining the flow but also about retaining it in future periods. It is shown that this is likely to cause the proportion of the rent flow converted into social cost to be well below 100% regardless of whether the rent sought is small relative to initial wealth and regardless of whether rent seekers are risk-neutral or risk-averse. These findings demonstrate that large errors are likely to be made in monopoly welfare loss studies if observed monopoly rents continue to be employed as a measure of the value of resources used in rent-seeking activities.     

Social decision rules are not immune to conflict

Why is rent-seeking so endemic in societies? Might it not be possible to design a Pareto-improving social decision rule that sidesteps the inefficient waste of resources resulting from conflict? We study this question for a multi-player contest. We assume that a benevolent planner knows the winning payoffs, the effectiveness of each rent-seeker, that the cost of expending resources is isoelastic, and that it is the same across all players. But she does not know the precise value of this elasticity. We show that this minimal lack of information leads to the impossibility of a Pareto-improving social decision rule, as long as there are at least four agents. Received: June 1999 / Accepted: January 24, 2000     

Withdrawal behavior and withholding efforts at work (WBWEW): Assessing the financial cost

In the continuing effort to confront the loss of profitability to industry as a result of withdrawal behavior and withholding efforts at work, this article presents an advanced and improved formula for estimating both the direct and indirect costs to a company resulting from this errant behavior. The emphasis is on a quantitative approach that incorporates the added value of forgone revenue rather than merely the cost of payments to the absentees as in earlier quantifications.     

Endogenous coalition formation in contests

This paper analyzes coalition formation in a model of contests with linear costs. Agents first form groups and then compete by investing resources. Coalitions fight for a prize that is assumed to be subject to rivalry, so its value is non-increasing in the size of the group that obtains it. This formulation encompasses as particular cases some models proposed in the rent-seeking literature. We show that the formation of groups generates positive spillovers and analyze two classes of games of coalition formation. A contest among individual agents is the only stable outcome when individual defections leave the rest of the group intact. More concentrated coalition structures, including the grand coalition, are stable when groups collapse after a defection, provided that rivalry is not too strong. Results in a sequential game of coalition formation suggest that there exists a non-monotonic relationship between the level of underlying rivalry and the level of social conflict.

“If men were supplied with every thing in the same abundance, justice and injustice would be equally unknown among mankind.” David Hume (1740), A Treatise of Human Nature

I thank Luis Corchón, Joan Esteban, Michelle Garfinkel and József Sákovics for their comments and suggestions on the paper.     

Rent Seeking in the Cameroon Economy: Krueger's Analytic Technique Helps to Account for Development Lag in Colonial States

Abstract . Traditional economic theory regards the social costs of monopoly as the reduction in both consumer and producer surplus as a result of monopolization of certain sectors of the economy. Recent research has shown that a proper accounting of the social costs of monopoly must include the costs of obtaining and maintaining monopoly positions. Anne O. Krueger used the term “rent seeking” to refer to the expending of scarce resources by entrepreneurs to fight for rents created through government activity in the economy. Excessive interference in the economy by government can result in an increase in the social costs of monopoly. In a developing country such as Cameroon, where government activity in the economy has been quite pervasive since the latter part of the 1800s, opportunities have been created for rent seeking. This type of activity has helped to impede the economic growth of the country.     

Henry George and Europe

Abstract . Henry George's land reform ideas became known in Germany not through his writing or speaking but through the efforts of Michael Flürscheim, an industrialist and pioneer social reformer, who first presented those ideas to the public. The American's idea that the land value tax was the only legitimate source of government revenue as the only economic surplus had found no acceptance among German socialist leaders. It was a capitalist, Flürscheim, who was inspired by George's theories and wrote and spoke about them. Flürscheim brought about the foundation of the first German land reform organization. Though it failed, a successor became the largest such association in the world.     

The Economic Impact of Rent Seeking and Military Expenditures: A Comparison of Third World Military and Civilian Regimes

Abstract . The general stereotype of modern Third World military regimes is that of ultra-conservativism combined with military force to dismantle organizations of popular expression. These organizations through their rent-seeking activities are assumed to have reduced overall rates of economic growth. Empirically, the paper does find some support for this line of argument. However, it is apparent that the traditional stereotypes are inappropriate. The two regime types differ largely in terms of contrasting styles of economic management. Military regimes create an environment where military expenditures tend to have a positive overall impact on economic growth Civilian regimes having less control over rent seeking groups do not appear to be able to combine rent seeking activities and military expenditures in a manner conducive to overall economic growth.     

Program planning with Tobit analysis—the United States food stamp case

The purpose of this paper is to illustrate the usefulness of the Tobit model in program planning. The avenue of display is the U.S. Food Stamp Program. Special analytical problems are encountered when the number of eligible nonparticipants of government programs is substantial. Under such circumstances difficulties arise with the use of ordinary regression techniques. The Tobit model is designed to reliably estimate relations from data encumbered with obstacles of this kind. Applications shown herein include program participation prediction and elasticities and probability changes associated with isolated exogenous variable changes.     

Strategic managerial incentives under adverse selection

We extend the strategic contract model where the owner designs incentive schemes for her manager before the latter takes output decisions. Firstly, we introduce private knowledge regarding costs within each owner–manager pair. Under adverse selection, we show that delegation involves a trade‐off between strategic commitment and the cost of an extra informational rent linked to decentralization. Which policies will arise in equilibrium? We introduce in the game an initial stage where owners can simultaneously choose between control and delegation. We show that if decision variables are strategic substitutes, choosing output control through a quantity‐lump sum transfer contract is a dominating strategy. If decision variables are strategic complements, this policy is a dominated strategy. Further, two types of dominant‐strategies equilibrium may arise: in the first type, both principals use delegation; in the second one, both principals implement delegation for a low‐cost manager and output control for a high‐cost one. Copyright © 2005 John Wiley & Sons, Ltd.     

Evaluating Economic Justifications for Alcohol Restrictions

Abstract . Does economics justify restricting alcohol consumption? A new line of research concludes that alcohol involves significant social costs and that various restrictions would lead to net social gains. This article focuses on Levy and Miller (1995 ), who conduct a cost‐benefit analysis of serving‐intoxicated‐patron laws. We administer a survey of taverns in Washtenaw County, Michigan, to investigate the plausibility of some of Levy and Miller’s claims. We find a number of problems with their economic discussion: in addition to a number of problematic assumptions, they count private costs as social costs and completely ignore consumer and producer surplus associated with alcohol. We find their assumptions bias the results in favor of the restrictions. Despite their popularity in public policy debates, these economic justifications for restricting alcohol are dubious.     

A suggested methodology for calculating the cost of university graduates

Costs are the valuations placed on the use of resources; they include operating and opportunity costs. As such they vary according to one's orientation. In higher education, costs can be evaluated from the point of view of three entities: the university as an economic firm (institutional cost); the students as private individuals (private cost); and society at large (social cost). This paper considers the institutional costs of higher education.Based on a hypothetical college model, two methodologies are suggested for evaluating the institutional costs in the “production’ of university graduates. The net-value-added method assumes that the cost of dropouts is inherent in the cost of graduates. The cost-per-student-year method assumes that dropouts and graduates are joint products of the educational system each with their own separate costs.The application of the two cost models is demonstrated with empirical data based on the University of Mosul in Iraq. The implications of the suggested methodologies for institutions with diverse specializations, high dropout rates, or large proportions of transfer students are also discussed.     

Is Technology-ridden U.S. Agriculture in a Long-run Decline?

Abstract . The American family farm is threatened by the combination of low, unstable commodity prices and high costs of machine and chemical technology. Overplanting, erosion, excessive taxation, and non-farm development diminish the best cropland. Government and corporate business policy have encouraged overproduction and soil abuse. To survive, the small farmer takes a second job or joins the urban industrial proletariat. No single national organization protects agriculture or equals the effective lobbying of business and unions for their own interests. “Modern” technology often produces less per land unit than traditional labor-intensive cultivation and costs more in terms of energy, capital, and depleted soil and natural resources. Usurious interest, archaic tax laws, and rapid rise of current technological production costs force insolvency of the small farm while facilitating expansion of giant agribusiness corporations, but technological innovation may have reached the point of diminishing returns. Meanwhile disruption of rural society continues, aggravating metropolitan overpopulation, unemployment, and social disorganization.     

John A. Hobson: Economic Heretic

Abstract . John A. Hobson was a self-styled economic heretic who developed and original and remarkably comprehensive system of economic and social thought. This system is based on certain distinctively Hobsonian concepts and theories. Hobson's economic heresies were based on his theory of distribution in which he rejected orthodox marginal productivity theory and developed a theory of economic surplus the distribution of which is determined by economic power. This underlay his theory of under-consumption which in turn was used to explain and analyze economic and social issues such as unemployment, the business cycle, the labor movement, imperialism and taxation. Hobson was also critical of the whole methodology of economic science on the grounds that it abstracted from human welfare in its widest sense. He argued that proper values should be introduced into the study of economic activity so that it could assist in the attainment of the best conditions of human life, both social and individual.     

Henry George and the Classical Scientific Research Program: The Economics of Republican Millennialism

Abstract . Henry George's classicism was evident in his acceptance of “hard core” assumptions inherent in classical economic analysis, notably that rational self-interested behavior exercise in competitive markets maximized economic welfare. However, George's “stage theory,” the “Law of Human Progress,” led him to reject the classical nexus between social and economic welfare. The emergence of an exchange economy improved efficiency and economic welfare, but institutional changes lagged behind, particularly the redefinition of property rights. Consequently, economic growth based on land as a private rather than public good widened the gap between economic efficiency and social welfare. Hence George's paradox of poverty amidst progress. George resolved the equity efficiency conflict by treating land as a public good. Then, the sale of monopoly rights to land through the “single tax” on land rents captured the difference between the private and social costs of land use.     

Efficiency measurement in the manufacturing firm

Manufacturing firms with standard costing systems use accounting cost variance heuristics to measure the expost performance of the organization and control costs. This article shows that if the underlying technology of the firm is semi-translog then the data provided by a standard costing system can also be used to compute economic performance indices, such as Malmquist and Konus indices, without incurring additional information costs. These indices can be used either in place of or in conjunction with accounting variances to help control the costs of the organization by allocating responsibility over these indices to those managers who (partially) control them.The refereeing process of this paper was handled through S. Hackman.     

Entrepreneurial talent and economic development in China

In this paper, we argue that the economic miracle of China in the past three decades can be attributed to the reallocation of entrepreneurial talent from the government/state and agricultural sectors to business activities. This change is unprecedented in the past two thousand years of Chinese history. When entrepreneurial talent was moved more to business activities, it created wealth, and the economy boomed. Three dominant groups of entrepreneurs are identified: (1) Peasants-turned entrepreneurs, (2) officials-turned entrepreneurs, and (3) overseas-returned, and engineers-turned, entrepreneurs. They have emerged sequentially, and successively led three decades of economic growth. The success of the Chinese economy arises from a gradual replacement of position-based rights with property-based rights that has triggered this reallocation of entrepreneurial talent. We also argue that when position-based and property-based rights coexist, value-creating and rent-seeking can be complementary. Therefore, one should not be puzzled by the coexistence of rapid economic growth and pervasive corruption in China. In order to improve the efficiency of allocation of entrepreneurial talent and efforts, it is important to further reduce the domain of position-based rights, and build a better-defined and more effectively-protected property rights system.     

On nonrenewable resource oligopolies: The asymmetric case

We give a full characterization of the open-loop Nash equilibrium of a nonrenewable resource game between two types of firms differing in extraction costs. We show that (i) there almost always exists a phase where both types of firms supply simultaneously, (ii) when the high cost mines are exploited by a number of firms that goes to infinity the equilibrium approaches the cartel-versus-fringe equilibrium with the fringe firms acting as price takers, and (iii) the cheaper resource may not be exhausted first, a violation of the Herfindahl rule, that may be detrimental to social welfare.     

The cost of Corporate Social Responsibility: the case of the Community Reinvestment Act

A Data Envelopment Analysis (DEA) cost minimization model is employed to estimate the cost to thrift institutions of achieving a rating of ‘outstanding’ under the anti-redlining Community Reinvestment Act, which is viewed as an act of voluntary Corporate Social Responsibility (CSR). There is no difference in overall cost efficiency between ‘outstanding’ and minimally compliant ‘satisfactory’ thrifts. However, the sources of cost inefficiency do differ, and an ‘outstanding’ rating involves annual extra cost of $6.547 million or, 1.2% of total costs. This added cost is the shadow price of CSR since it is not an explicit output or input in the DEA cost model. Before and after-tax rates of return are the same for the ‘outstanding’ and ‘satisfactory’ thrifts, which implies a recoupment of the extra cost. The findings are consistent with CSR as a management choice based on balancing marginal cost and marginal revenue. An incidental finding is that larger thrifts are less efficient.