Abstract
A substantial portion of the research on rent-seeking addresses the issue of rent dissipation. This line of inquiry is drawn directly from Tullock’s (1967) stated intent to identify the total social costs of monopoly. Early studies, which were concerned with the measurement of Tullock costs, simply assumed dissipation would be complete (see Becker, 1968; Kruger, 1974; Posner, 1975; and others). However, Posner (1975) and Fisher (1985) observed the question of dissipation can be answered only for overtly specified game structures.
The authors wish to thank Randall Holcomb, Philip Porter, William Shugart and Gordon Tullock for helpful comments on an earlier version. Naturally remaining errors are the responsibility of the authors.
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Notes
The Magee paper cited by Wenders is a secondary source which contains neither a model nor description of the prisoners’ dilemma application. However, a citation within that paper, Magee and Young (1982), contains their model and analysis. The version supplied to us by Magee and cited herein is a later version dated 1984.
There are several problems with this assumption including the public good characteristic of non-exclusion (see Ursprung, 1989), and the differing organizational costs of consumers and producers.
An alternative approach would be to include a consumer coalition as an additional competitor to the ten firms. Under this formulation the expected value for all competitors is (1/11) T and the perfect dissipation result is unchanged. Curiously, if Wenders logic is accepted, i.e., all players bid the rent at stake, total dissipation would equal $11,000,000, but even Wenders does not suggest this magnitude of shortsightedness. Why are consumers less able to adjust for competition than producers? Why do producers adjust their bid to one type of competitor but not another?
Using a general equilibrium model, DeLorme and Snow (forthcoming) reach a similar conclusion. Specifically, they show rent-avoidance typically reduces social waste and dissipation is less than the Harberger-Tullock trapazoid as long as rent-seeking and/or rent-defending is not subsidized by the government.
More recently Tullock (1987) argues social losses will be higher than the efficient rent-seeking model suggests, but those issues lie outside this discussion.
In cases where the rent-defender is a coalition of consumers defending the competitive price, they have an additional stake equal to the value of the Harberger triangle. Their expected value is similar to equation (3) with T′ = T + H substituted for T.
The foregoing analysis implicitly assumes producers’ and consumers’ expenditures are equally efficient in changing the probability of capturing the monopoly rent. However, if there is a bias, say in favor of existing property rights, the magnitude of dissipation would be reduced further.
Some interesting arrangements are omitted. For example, coalitions could negotiate contracts defining the proportion of expenditures provided by each member of the team and rules governing the distribution of the rent if their coalition wins. Or, the rules of the game could limit all bids to the beginning (no bids in stage two). In these cases Posner’s original conclusion holds.
Wenders claims his essay points to excess dissipation for costs that are either recurring or sunk. Not only do bidders play negative sum games, but they do so repeatedly.
Total dissipation also differs. If the independent player wins the first round, there is full dissipation as no expenditure occurs in round two. Double dissipation occurs only when the first round is won by a coalition.
Naturally, a person could play twice, but each bid is an independent decision.
There are several interesting ways to formulate two-stage games and many yield unique results. Unfortunately, a comprehensive review would lead us far astray. The case explored here was selected because it seemed to be in line with Wenders’ thinking.
Tollison’s (1989) “superdissipation” appears to be a viable theory for excess dissipation.
For example, Hillman and Riley (1989) and Paul and Wilhite (1990) present several rent-seeking structures applicable to a variety of situations.
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Paul, C., Wilhite, A. (2001). Rent-seeking, rent-defending, and rent dissipation. In: Lockard, A.A., Tullock, G. (eds) Efficient Rent-Seeking. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-5055-3_16
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DOI: https://doi.org/10.1007/978-1-4757-5055-3_16
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