Rent Seeking, Institutions, and Policy Effectiveness

• Author: Era Dabla-Norris
• Pages: 1-5

Page 1

Chakraborty and Dabla-Norris (2005) develop an economic model of the relationship between rent-seeking behavior, distribution of wealth, and economic performance in order to address the question of what drives entry into rent-seeking activities. They show that in the presence of weak institutions for property rights protection, imperfect credit markets, and a fixed cost to rent seeking, only wealthy agents choose to engage in rent-seeking activities, as this enables them to protect their wealth from expropriation by others. In this environment, simply taxing the rich and redistributing tax revenues to the poor may be counterproductive if it raises the post-tax endowments of the poor and gives them incentives to engage in rent seeking.Page 4 A better policy option would to use tax revenues to subsidize production directly, since this raises the return to investment for all. Ruhashyankiko and Yehoue (forthcoming) develop an occupational model embodied in an agency framework to analyze whether rent-seeking behavior is an outcome of a lack of outside options for public officials. They show that technologically-induced private sector expansion leads to a decline in public rent seeking, as it provides an outside option to public officials who might otherwise engage in such activities. They distinguish between public and private rent seeking, and provide empirical evidence that suggests that a decline in public rent seeking outweighs any potential increase in private rent-seeking activities that could accompany private sector expansion.

The availability of natural resources in developing countries is frequently cited as a factor that contributes to rent seeking. Sala-i-Martin and Subramanian (2003) find that the presence of natural resources that generate rents and are easily appropriable, such as oils and minerals, can exert a negative and nonlinear impact on a country's long-run growth through its deleterious impact on the quality of institutions.

"While economists and policymakers have long recognized that institutions matter in determining economic performance, a more difficult question is why, given the high costs of rent seeking, countries do not improve their institutions and root out such behavior."

While economists and policymakers have long recognized that institutions matter in determining economic performance, a more difficult question is why, given the high costs of rent seeking, countries do not improve their...