The Political Economy of the Rent-Seeking Society

1. The Political Economy of the Rent-Seeking Society

2. Major Goals of Paper • Show how rent-seeking is competitive under different import license allocation schemes • Develop a model of trade restrictions, and incorporate rent-seeking • Examine potential welfare losses from rent-seeking • Analyze any differences relating to rent-seeking between using import quotas and import tariffs

3. Different import license allocation schemes and competitive rent-seeking • Licenses for imports are allocated in proportion to firm capacity • An increase in plant size will result in a higher expected volume of import licenses and thus more quota rents. • Managers will continue to create excess capacity until the returns from rent-seeking equal the returns form other investments. • The creation of excess capacity amounts to a welfare loss.

4. Licenses are allocated in proportion to applications • Each importer receives fewer imports than are needed to stay in business, but they earn enough extra profit on the license to make up for the loss from reduced imports. • Given some number of import licenses there will then be a larger than optimal number of firms, each operating above minimum average cost (no cost efficiency).* • competition for rents occurs through entry into the industry with smaller-than-optimally sized firms, and resources are used in that the same volume of imports could be efficiently distributed with fewer inputs if firms were of optimal size.

5. Government officials determine who gets the import licenses • Competition occurs in both ways discussed above • Competition also takes the form of attempts to influence the government officials • Travel to meet with officials, relocation of the firm, hiring relatives of customs officials, bureaucrats and politicos who are less productive, or promises to hire officials after retirement • Bribery (hopefully less common) • There are efforts above the efficient level of people trying to be in a government position to receive rents

6. Are Rents Considerable • India (1964): Rents from import licenses amount to more than 5% of GDP. • Turkey (1968): Rents from import licenses were about 15% of GDP. • Given that there exists competition for these rents, the rents are largely, entirely or more than entirely dissipated. • These Deadweight Costs are in Addition to the Welfare Costs of the Initial Tariff Equivalent Trade Restrictions.

7. The Effects of Rent Seeking for Import Licenses – The Model • Two commodities: food and consumption goods – comparative advantage in food • Two industries with free trade: agriculture (production of food) and distribution (purchase and export of food). • Third possible industry = rent-seeking • Ricardian setting (factors of production are used in constant proportions → can treat as one input, labor) • Small economy – world price is one (PF/PM = 1)

8. Implications • An embargo might be preferable to a nonprohibitive quota – the excess cost of domestic production might be less than the value of the rents (DWL). • Competition in general is most efficient, but with an import quota competition among importers is more inefficient than a monopoly. Creating a monopoly importer may actually decrease the DWL associated with quota, but the distribution of income will be less equal. • There may be rent-seeking with tariffs as well (lobbying efforts, unproductive hiring, wasteful competition to be in a position to receive rents and bribes, and rent-seeking for new government revenues.

9. There Are Many Forms of Rent-Seeking • Fair trade laws result in firms of less-than-optimal size. • Minimum wage legislation generates equilibrium levels of unemployment above the optimum with associated deadweight losses. • Ceilings on interest rates and consequent credit rationing lead to competition for loans and deposits and/or high-cost banking operations. • Regulating taxi fares affects the average waiting time for a taxi and the percent of time taxis are idle. • Capital gains tax treatment results in overbuilding of apartments and uneconomic oil exploration. • And so on.