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Rent Seeking, Market Structure and Growth

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Author Info
Daniel Brou
Michele Ruta

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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.

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Publisher Info
Paper provided by European University Institute in its series Economics Working Papers with number ECO2007/03.

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Date of creation: 2007
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Handle: RePEc:eui:euiwps:eco2007/03

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Related research
Keywords: Rent Seeking; Market Structure; R&D Investment; Growth; Welfare;

Find related papers by JEL classification:
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives

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    Other versions:
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    Other versions:
  5. Philippe Aghion & Richard Blundell & Rachel Griffith & Peter Howitt & Susanne Prantl, 2004. "Entry and Productivity Growth: Evidence from Microlevel Panel Data," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 265-276, 04/05. [Downloadable!] (restricted)
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  8. Angeletos, George-Marios & Kollintzas, Tryphon, 2000. "Rent Seeking/Corruption And Growth: A Simple Model," CEPR Discussion Papers 2464, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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    Other versions:
  11. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
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  12. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August. [Downloadable!] (restricted)
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  13. Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 893-921, October. [Downloadable!] (restricted)
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  16. Aghion, Philippe & Howitt, Peter, 2005. "Growth with Quality-Improving Innovations: An Integrated Framework," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 2, pages 67-110 Elsevier. [Downloadable!] (restricted)
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  19. Dixit, Avinash & Grossman, Gene M & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 752-69, August.
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  21. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February. [Downloadable!] (restricted)
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