An experimental investigation of efficient rent-seeking

Edward Millner and Michael Pratt

Public Choice, 1989, vol. 62, issue 2, 139-151

Abstract: The debate about the measurement of the amount of rent dissipated in rent-seeking activities is unable to be answered by observations from the naturally occurring environment. Current theoretical investigations have indicated that a number of factors will affect the amount of rent that can be assumed to be dissipated by rent-seeking. The theory of efficient rent-seeking predicts that the number of rent-seekers, their risk posture, their ability to enter and exit the rent-seeking process, and the manner in which the probability of receiving a rent is determined will affect the amount of rent that is dissipated. To derive some indication of the appropriateness of the predictions from the model, we report a laboratory investigation of rent-seeking activity. The experiments involved two participants and were based on Tullock's analysis of rent-seeking as a lottery. The empirical results indicate that the manner in which the probability is determined does matter in rent-seeking activities. As predicted by the theory, participants in experiments where the exponent in the probability function equalled three dissipated significantly more of a lottery prize than participants in experiments where the exponent equalled one. Therefore, our results lend support to Tullock's argument that social welfare is protected by adopting institutions which lower the exponent if such an adoption can be effected without adverse effects on the efficiency of the selection process. We view our experiments as a first attempt to use laboratory methods to examine rent-seeking. Much work remains. For example, our results indicate average dissipation rates in excess of that predicted by the Cournot-Nash solution when the exponent equals one and below that predicted by either the Cournot-Nash or a precommitment strategy when the exponent equals three. An obvious question is why? Future experimental work should address the extent to which consistent-conjectures outcomes, focal point solutions, and end-game strategies cause the observed divergence from the predicted values. Also, future laboratory experiments are needed to address other issues raised by the theory such as the effects of changing the number of rent-seekers and of allowing rent-seekers to enter and exit the rent-seeking process. These types of experiments will help refine how we estimate the welfare loss created by rent-seeking activities. Copyright Kluwer Academic Publishers 1989

Date: 1989
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DOI: 10.1007/BF00124330

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