Where are the rent seekers?

In a remarkably simple and yet one of the most original and insightful observations of 20th century economics, Gordon Tullock pointed out that there are efficiency losses when public policies and political behavior create contestable rents. Tullock also observed that social losses from contesting rents appeared smaller than might be expected, so raising the question ‘where are the rent seekers?’ Tullock proposed that political accountability and ‘free-riding’ incentives in interest groups limit social losses from rent seeking. We affirm Tullock’s explanations, which apply differently under different political institutions. We compare Tullock with Gary Becker, who focused on deadweight losses from redistribution and concluded, in contrast to Tullock, that political redistribution is efficient. The comparison with Becker highlights the significance of the recognition of Tullock’s concept of rent seeking. By excluding rent-seeking losses from the social costs of redistribution, Becker could arrive at a conclusion more favorable than Tullock to an ideology that sees merit in extensive redistribution. Tullock’s model, although more encompassing of actual social costs of redistribution, would have been less welcome in the social democratic welfare state.     

Labor Market Information Acquisition and Downsizing

We study the optimal mechanism for downsizing the public sector which takes into account different informational constraints (complete versus asymmetric information on each worker’s efficiency) and political constraints (mandatory versus voluntary downsizing). Under complete information, the optimal structure of downsizing (who is laid‐off and who is not) does not depend on the political constraint and is determined by the (marginal) cost of retaining a worker in the public sector. Since this cost includes his opportunity cost in the private sector, information acquisition on opportunity costs affects the structure of downsizing. Under asymmetric information, the political constraints determine which workers obtain information rents and therefore affect the structure of downsizing. An increase in the precision of the information on workers’ opportunity costs may increase or decrease social welfare depending on its impacts on the information rents.     

Policy making and rent-dissipation: An experimental test

We present a transfer-seeking model of political economy that links the theory of Becker (1983) with Tullock-type models of politically contestable rents. In our model the size of the transfer is determined endogenously, and over-dissipation of rents is predicted even under conditions of risk-neutrality and perfect rationality. We implement an empirical test of this model by collecting behavioral data in a laboratory experiment. We confirm the existence of behavior that leads to over-dissipation of rents in games with both symmetric and asymmetric political power. To the extent that the transfer-seeking costs are social costs, our findings imply that the total costs of running government might be greatly underestimated if the value of the rent is used as a proxy for the rent-seeking cost. We also confirm the hypotheses that lowering the political power of one player can lead to smaller rent-seeking expenditures and to larger transfers Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C91, D72     

The Political Economy of Clientelism*

In this paper, we argue that the political‐commitment problem provides an explanation for why much income redistribution takes an inefficient form, particularly employment in the public sector. A job is a credible way of redistributing when it provides rents (such as in situations with moral hazard), and employment is optimal ex post. Moreover, a job is selective and reversible, and thus ties the continuation utility of a voter to the political success of a particular politician. We show that the need to make offers of employment incentive‐compatible leads to inefficiencies in the supply of public goods. We also show that such inefficient redistribution becomes relatively attractive in situations with high inequality and low productivity. Inefficiency is increased when the stakes from politics are high, when inequality is high, and when money matters less than ideology in politics.     

Optimal control of an invasive species with imperfect information about the level of infestation

The presence of invasive species is often not realized until well after the species becomes established. Discovering the location and extent of infestation before the invasive species causes widespread damage typically requires intensive monitoring efforts. In this paper, we analyze the problem of controlling an invasive species when there is imperfect information about the degree of infestation. We model the problem as a partially observable Markov decision process in which the decision-maker receives an imperfect signal about the level of infestation. The decision-maker then chooses a management action to minimize expected costs based on beliefs about the level of infestation. We apply this model to a simple application with three possible levels of infestation where the decision-maker can choose to take no action, only monitor, only treat, or do both monitoring and treatment jointly. We solve for optimal management as a function of beliefs about the level of infestation. For a case with positive monitoring and treatment costs, we find that the optimal policy involves choosing no action when there is a sufficiently large probability of no infestation, monitoring alone with intermediate probability values and treatment alone when the probability of moderate or high infestation is large. We also show how optimal management and expected costs change as the cost or quality of information from monitoring changes. With costless and perfect monitoring, expected costs are 20–30% lower across the range of belief states relative to the expected costs without monitoring.     

A Theory of Civil Conflict and Democracy in Rentier States*

The effects of resource rents on the political equilibrium have been studied in two main types of models. The first tradition uses models of conflict, and studies how resource rents affect the intensity and duration of civil conflict. The second tradition uses political economy models, where resource rents affect the political equilibrium due to changes in the costs and benefits of buying votes. Although they provide considerable insight, these traditions have little to say about when democracy emerges, and about when conflict emerges. In this paper, by integrating the earlier model traditions, we suggest the simplest possible framework we can think of to study the choice between conflict and democracy. We show how factors such as resource rents, the extent of electoral competition, and productivity affect economic and political equilibria.     

The political economy triangle of government spending,interest-group influence,and income inequality: Evidence and implications from the US states

This paper introduces the political economy triangle (PET) concept of government spending, special interest groups (SIGs) influence, and income inequality, empirically confirming its existence and unveiling its nature while directly addressing key shortcomings of most prior research on the determinants of such inequality. Using static and dynamic panel techniques and data from the US states, it reports several new results: (i) the findings of previous studies regarding the roles of government spending and interest groups, including labor unions, in income distribution are confirmed, however, their estimated inequality effects grossly underestimate those obtained when endogeneity issues are accounted for explicitly; (ii) a dynamic tripartite relationship between the variables of the PET exists; (iii) government spending and SIGs' influence, including union strength, beyond their direct effects on inequality, have a separate positive impact through their interactions; (iv) the effectiveness of government spending in reducing inequality diminishes as the level of SIGs' influence and union strength increase in the short and long run, (v) the aggregate inequality-increasing effect of SIGs is strengthened and the inequality-reducing effects of unions weakened as the spending rises, in the short run and long run. Finally, the broad implications of these findings are discussed.     

Democracy,inequality and the environment when citizens can mitigate health consequences of pollution privately or act collectively

We study the political economy of the environment in autocratic, weak and strong democracies when individuals can mitigate the health consequences of domestic pollution privately as well as control pollution collectively through public policies. We consider a small open economy with comparative advantage in dirty goods. With costly private mitigation, income inequality leads to an unequal distribution of the burdens of pollution (in accordance with the evidence). We show that the eco-friendliness ranking of political regime types varies with the cost of private mitigation and that increased inequality has non-monotonous effects on equilibrium pollution levels. In weak democracies, the political equilibrium may be characterized by low environmental standards but highly restricted trade, thus leading to ambiguous outcomes regarding pollution levels.     

Political capitalism: The interaction between income inequality,economic freedom and democracy

We study the relationship between income inequality and economic freedom for a panel of 100 countries for the 1971–2010 period. Using a panel Granger non-causality approach, we reject the null hypothesis of Granger non-causality running from income inequality to economic freedom, but not vice versa. From a series of dynamic panel estimations we show that the effect of income inequality on economic freedom is negative and robust to the inclusion of additional controls. In particular, inequality is negatively associated with those components of economic freedom related to international trade, domestic market regulation as well as the rule of law and property rights protection. We argue that the negative effect of inequality on economic freedom is due to the economic elite converting its economic power into de facto political power to defend its economic interests; these interests run counter to economic freedom, discouraging innovation and competition as well as protecting the elite's rents. Finally, we show that economic freedom decreases with income inequality even in democratic countries, suggesting that democratic institutions do not prevent economic freedom from eroding. We argue that the latter finding corresponds to a system of political capitalism or captured democracy, where a powerful economic elite can nevertheless exercise de facto political power by cooperating with politicians and other decision-makers for their mutual benefit.     

SYNCHRONISING DEREGULATION IN PRODUCT AND LABOUR MARKETS

Deregulation typically comes with redistribution of rents and thus with opposition from the losing interest groups. We show that, by exploiting complementarities, synchronising deregulation across markets makes this opposition lower. Indeed, a particular deregulation may reduce rents for one interest group, but may result in gains for another interest group. Synchronising reforms can therefore offer a way out of the ‘sclerosis’ of especially European markets. For this effect, we build a microeconomic model based on two assumptions: Cournot competition à la Vives in the product markets and firms hiring workers in accordance with an efficiency wage in the labour markets. As being particularly relevant for European economies, we focus on product market regulation that determines the degree of market integration and labour market regulation that determines the degree of employment protection.     

Development Policy Lending, Conditionality, and Ownership: A Dynamic Agency Model Perspective

Is the World Bank's Development Policy Lending likely to enhance ownership and have greater effectiveness than structural adjustment? We specify a dynamic common agency model in which a government considering economic reform faces domestic opposition from interest groups. The dynamic specification, which is original in the context of policy reforms supported by the International Financial Institutions (IFIs), is essential to allow the strength of special interest groups to arise endogenously during the reform process. We show that conditionality may alter the country's political equilibrium and lead to higher social welfare. However, under certain circumstances which depend on country‐specific circumstances, conditional assistance could lead to lower social welfare. Thus, for conditionality not to be inconsistent with ownership, its design must be appropriate to the country circumstances and directly affect the domestic political constraint.     

Tax treatment of owner occupied housing and wealth inequality

We construct a quantitative general equilibrium lifecycle model with housing tenure decisions to investigate the degree to which wealth inequality in the United States is affected by the preferential tax treatment of home-ownership. Favorable tax treatment of owner occupied housing in the form of home mortgage interest and property tax deductibility, and the untaxed nature of imputed rents, provides a financial incentive for home-ownership over renting as well as an incentive to “over-consume” housing since houses are not fungible. Since the favorable tax treatment of housing disproportionately creates tax savings for the upper quantiles of the income distribution, we quantify how it contributes to the heavily right skewed distribution of wealth in the United States using data from the Survey of Consumer Finances. We consider a revenue-neutral government response to the counter factual experiments of removing the current tax structure on housing. Our quantitative analysis shows that, in terms of distributional effects, removing all of the preferential tax treatments results in an aggregate increase in welfare. However, we do not find any reduction in inequality. We also find that while some re-allocation toward financial assets occurs, households primarily increase their consumption when imputed housing rents are taxed and the property tax deduction is removed. Thus housing tax policy may be effective at encouraging more overall saving through housing assets.     

Political rents in a non-corrupt democracy

A fundamental problem in all political systems is that the people in power may extract rents to the detriment of the general public. In a democracy, electoral competition and information provided by the media may keep such rent extraction at bay. We develop a simple model where rents are decreasing in the degree of political competition and voter information. In line with our theoretical predictions, we find that both increased political competition and increased local media coverage substantially reduce direct measures of legal political rents among local governments in a non-corrupt democracy (Sweden).     

An informational perspective on administrative procedures

A number of scholars have identified the important role administrativeprocedures have in 'structuring' the interest group environmentof government agencies: determining who can participate andin what manner. Using a formal model, we analyze the incentivesand outcomes that different procedural - and therefore interestgroup - environments generate. The model yields a number ofimportant conclusions. First, because elected officials areconcerned not only about distributional rents, but also informationalones, the use of procedures in some cases will result in worseoutcomes for political principals on the policy dimension. Officialswill be willing to bear the losses in exchange for informationalgains. Second, under certain conditions, a politician is betteroff with a biased group monitoring the agency rather than aneutral one, since biased groups will subsidize a portion ofthe monitoring cost. Third, having multiple interest groups,including one in opposition to the politician, makes the politicalprincipal strictly better off than any other constellation ofmonitors, since competing interest groups will provide the greatestinformation at the lowest cost to the elected official.     

INTEREST GROUPS, INFLUENCE AND WELFARE

This paper examines the social costs and benefits of special interest group political influence activities. It is commonly recognized that, to the extent that such activities induce legislators to choose policies that favor the interest group at the expense of society at large, they can reduce welfare. It may also be the case, however, that lobbying can convey information held by interest groups to policy-makers. When costless announcements would not be credible, interest groups can signal their private information through costly influence activities. To the extent that this information enables governments to choose better policies, lobbying can enhance welfare. A simple game between a special interest group and a policy-maker that captures this tradeoff between the distortionary costs and the informational benefits of political influence activities is developed. Welfare properties of the equilibria are analyzed, and conditions are derived under which social welfare is greater when lobbying occurs than it would be if lobbying were prohibited. In conclusion, the phenomenon analyzed in this paper is related to Bhagwati's taxonomy of DUP activities.     

Analyzing the System of Preferential Tariffs for Least Developed Countries

This paper analyzes the rents available from non‐reciprocal preferential tariffs for least developed countries (LDCs) on all exports to the quad countries at the tariff line level. Most of the rents come from the European Union (EU) in clothing and textiles, while the USA and Canada offer few rents and charge significant tariffs to LDCs. We develop a dual economy labor market model that generates an income distribution and simulates the distributional effects of preferences. We find that the benefits of the preferences outweigh any adverse distributional effects. Relative inequality may increase with preferences in some cases, but absolute incomes increase in every case. We conclude that in the absence of multilateral liberalization, preferences are beneficial to some LDCs and expansion of preferences is desirable. In the event of multilateral liberalization, an import subsidy scheme that maintains the rents is the most desirable outcome.     

官员规模、公共品供给与社会收入差距:权力寻租的视角

官员规模、公共品供给效率以及社会收入差距是当下社会比较关注的问题,本文试图把三个问题纳入到一个故事框架下来分析和解释。生产的进行需要官员提供资源帮扶,这需要通过雇佣下级官员来做到;当私人利益进入上级官员的收益函数时,上级官员就会促使资源的供给"人为"稀缺来设租,从而便于下级官员从生产者处收取资源租金;而资源租金的收取使得下级官员的收益高于其外部选择权收益,从而增加了下级官员职位的竞争性,又由于上级官员对下级官员职位任命权的垄断,使上级官员从下级官员处收取职位租金。分析表明,权力的设租寻租行为是造成社会收入差距出现的一个重要原因;在一个能较好限制官员关注私人收益的社会中,官员规模较小、公共品供给效率较高且因权力寻租而造成的社会收入差距较小。     

Fortress Europe: Jericho or Château d’If?

Traditional analysis of customs union formation suggests that it leads to an increase in members' external tariffs. This paper stresses two aspects of European trade and trade policy—a large volume of intra-industry trade between similar countries and a political motivation for tariffs—and highlights a role for tariff coordination in a model of differentiated products in which tariffs affect domestic costs and thus export prices and the magnitude of monopolistic rents. We show that when workers choose the tariffs and receive but a small portion of tariff revenues, the union's tariff wall falls.     

Could a higher inflation target enhance macroeconomic stability?

Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2%. We evaluate whether an increase in the inflation target to 3% or 4% could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.     

Economic liberalization in China and India: Issues and an analytical framework

A simple analytical framework is proposed for assessing the credibility and prospects for success of economic liberalization policies of China and India. It is argued that liberalization of external transactions is likely to yield only limited benefits unless it is accompanied by elimination of controls on domestic transactions. Further, in China economic liberalization is likely to generate demands for political liberalization which in turn may result in a retreat from economic reforms. In India, on the other hand, interest groups enjoying “rents” from economic controls may try to prevent their elimination.