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.