Excessive Public Employment and Rent-Seeking Traps

We propose an occupational choice model in which the quality of the state bureaucracy influences aggregate output and the level of entrepreneurial activity through its participation in the labour market. Skilled agents differ in terms of their public service motivation: if agents with low public mission become bureaucrats, they will use their position to rent seek, by employing an excessive number of unskilled workers. This generates an upwards pressure on wages, which lowers profits and deters entrepreneurship. A better equilibrium results when public service motivated agents self-select into the state bureaucracy, since they exert high effort and employ a limited number of workers. The model also shows that the working class might optimally choose to vote for an inefficient public sector. We provide evidence supporting the mechanism in our model by confronting some of its main predictions to a variety of data sources.