Efficiency and Equity: A General Equilibrium Analysis of Rent-Seeking

Ben J. Heijdra and Pim Heijnen

No 9375, CESifo Working Paper Series from CESifo

Abstract: We study the rent-seeking phenomenon using a simple, static general equilibrium model. The economy consists of two sectors, both employing a constant returns-to-scale technology with labor as its sole input. One of the sectors is a monopoly, where a continuum of agents compete for a share of monopoly profits (i.e. rent). Agents are heterogeneous in labor productivity and rent-seeking ability: they face a choice between engaging in (productive) work or vying for a share of the rent (i.e. a contest against other rent-seekers). At the aggregate level, rent-seeking reduces the available amount of labor in the economy and thereby lowers output and welfare (rent-seeking is inefficient). At the individual level, rent-seeking shifts income towards rent-seekers. Consequently, an economy with few rent-seekers tends to have high income inequality: an effect that is exacerbated by the fact that rent is decreasing in the number of rent-seekers (low levels of rent-seeking increase inequity). This tradeoff between efficiency and equity is the primary focus of this paper. We investigate how the distribution of rent-seeking ability and the correlation between labor productivity and rent-seeking ability shape this tradeoff.

Keywords: rent-seeking; economic waste; inequality; monopolization; contest (search for similar items in EconPapers)
JEL-codes: D62 D63 D72 E13 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-lab, nep-mac and nep-ore
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Related works:
Journal Article: Efficiency and equity: A general equilibrium analysis of rent‐seeking (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9375

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