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Rent Seeking, Tax Policy, and Economic Growth

It is suggested a Romer-Barro - type model of endogenous economic growth where producers contest for distribution of a fixed share of the government’s tax revenue. The proportional contest mechanism is assumed. We studied conditions under which consumers gain or lose due to existence of the Rent seeking, tax policy, and economic growth (RS) opportunities. It is found that RS always decreases rate of growth but nevertheless may raise consumer’s overall utility. RS is advantageous if tax rate is too high or rate of production return is too low. The area of parameters, where RS has positive effect, is larger for more impatient consumers. We study also a static RS production model with heterogeneous producers and show that excessive tax burden creates incentives for RS (which is interpreted as corruption). It is argued that the producers’ support of corruption-free regimes depends on the marginal cost elasticity of the production technologies and may be reached due to technical progress. The results demonstrate that the connection, observed in a number of empirical papers, between economic development and RS may be two - way since it may be caused by factors that influence both RS and economic growth.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20058.

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Date of creation: 2001
Date of revision:
Handle: RePEc:pra:mprapa:20058
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  1. repec:oup:restud:v:59:y:1992:i:4:p:645-61 is not listed on IDEAS
  2. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
  3. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1993. "Why Is Rent-Seeking So Costly to Growth?," American Economic Review, American Economic Association, vol. 83(2), pages 409-14, May.
  4. Robert J. Barro & Xavier Sala-i-Martin, 1990. "Public Finance in Models of Economic Growth," NBER Working Papers 3362, National Bureau of Economic Research, Inc.
  5. Lu, Ding, 1994. "The entrepreneurs who do both: Production and rent-seeking," Journal of Economic Behavior & Organization, Elsevier, vol. 23(1), pages 93-98, January.
  6. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
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  8. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  9. Olson, Mancur, Jr & Sarna, Naveen & Swamy, Anand V, 2000. " Governance and Growth: A Simple Hypothesis Explaining Cross-Country Differences in Productivity Growth," Public Choice, Springer, vol. 102(3-4), pages 341-64, March.
  10. Leonid Polishchuk & Alexei Savvateev, 2004. "Spontaneous (non)emergence of property rights," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(1), pages 103-127, 03.
  11. Andrei Shleifer, 1996. "Government in Transition," Harvard Institute of Economic Research Working Papers 1783, Harvard - Institute of Economic Research.
  12. Mohtadi, Hamid & Roe, Terry, 1998. "Growth, lobbying and public goods," European Journal of Political Economy, Elsevier, vol. 14(3), pages 453-473, August.
  13. A. Chong & C. Calderón, 2000. "Causality and Feedback Between Institutional Measures and Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 69-81, 03.
  14. Vladimir Popov, 2000. "Shock Therapy Versus Gradualism: The End Of The Debate (Explaining The Magnitude Of Transformational Recession)," Comparative Economic Studies, Palgrave Macmillan, vol. 42(1), pages 1-57, April.
  15. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  16. Bac, Mehmet, 1996. "Corruption and Supervision Costs in Hierarchies," Journal of Comparative Economics, Elsevier, vol. 22(2), pages 99-118, April.
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