Rent Seeking and Rent Dissipation in State Enterprises

We reflect on the use of state power in state-owned enterprises. An African case study is first recounted in which a private coffee exporting firm seeks to compete against a government- owned monopoly marketing board. A principal theme of the study is that state enterprises retain de facto control of their markets long after surrendering any de jure monopoly privileges. Managers of the state firm and their supervisors within the civil service form a coherent lobbying group whose interest is to defend the enterprise from competition. With this study as a backdrop, we offer a theory of rent seeking in state-owned enterprises. We argue that state firms in less-developed countries seek to maximize costs within the limits of the subsidies offered them by international donors. Government rent is the difference between such maximized cost and minimum cost. The portion of government rent determined by valuing inputs at competitive factor prices is dissipative in the sense that it vanishes from productive output. Dissipated government rent likely is larger than in the classical (Tullock) rent-seeking paradigm because a state firm’s managers have little incentive to limit their rent-seeking activities. Hence, renewed calls for state regulation can be expected once the present deregulation trend has run its course.