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Rent Seeking, Market Structure and Growth

Daniel Brou () and Michele Ruta

No ECO2007/03, Economics Working Papers from European University Institute

Abstract: We construct a model where firms compete in both political and economic markets. In political markets, firms compete for influence over government transfer policy (rents). This activity can be beneficial for the firm, but is purely wasteful from the point of view of society because resources are utilized to achieve a redistribution of income. In the economic market, firms compete for market share through cost reducing technological innovation. Market structure plays an important role in this economy because competition drives firms to invest more in innovation resulting in higher growth. Rent-seeking affects economic growth in two important ways. It diverts resources away from innovation and it affects the number of firms that are supported in equilibrium. The former has a negative effect on growth while the latter effect is ambiguous, depending on whether rent seeking induces entry or exit. This market structure effect depends on a combination of political and economic factors that the theory highlights.

Keywords: Rent Seeking; Market Structure; R&D Investment; Growth; Welfare (search for similar items in EconPapers)
JEL-codes: D72 L13 O31 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-com, nep-ent, nep-mic and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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