Controlling externalities in the presence of rent seeking
AbstractContests are a common method to describe the distribution of many different types of rents. Yet in many of these situations the utilisation of the prize plays an important role in determining agents payoffs and incentives. In this paper, we investigate the incentives to expend effort for a prize that produces consumption externalities and consider alternative regulatory policies. We find relatively more global consumption externalities will increase (decrease) rent seeking when con- sumption externalities are negative (positive). We show how introducing Pigouvian taxation (possibly with revenue transfer) and Coasean bargaining alters equilib- rium effort and payoffs. Pigouvian taxation tends to reduce both effort and payoffs whereas this is not always the case for Coasean bargaining. In the presence of suf- ficiently large consumption externalities, establishing Pigouvian taxation coupled with some element of lump-sum transfer may reduce costly rent seeking effort and improve the welfare of some agents compared to other approaches.
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Bibliographic InfoPaper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 09/111.
Length: 35 pages
Date of creation: Jul 2009
Date of revision:
externalities; contest; natural resources;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-03 (All new papers)
- NEP-ENE-2009-10-03 (Energy Economics)
- NEP-GTH-2009-10-03 (Game Theory)
- NEP-REG-2009-10-03 (Regulation)
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