Long-Run Equilibrium and Total Expenditures in Rent-Seeking

Abstract

How important rent-seeking is as a part of the total monopolistic waste hinges on the size of the total expenditures induced by a given level of excess profits.¹ Posner (1975) and Becker (1968) assert that total expenditures in the rent-seeking process will just equal the value of the rents to be gained although neither is specific about how this result would occur. This hypothesis has been adopted by those writing about rent-seeking and, more recently, it appears to have attained the status of an axiom (Foster, 1981). If rent-seeking could fit within the perfectly competitive model one would expect—in the long run—the equality of total expenditures and total revenues. The analogy with perfect competition, however, is not accurate. One difference is that the expenditures in rent-seeking are made to influence the probability of winning, not to cover the cost of production. Another is that in the case of one payoff only one competitor wins and obtains a positive return on his investment, the rest lose everything. Tullock (1980) shows that in a simple two-player lottery each player will maximize his expected value by investing one-quarter of the payoff at stake, not one-half, where total expenditures would equal the payoff. He goes on to show that the total expenditures can be greater, equal, or less than the payoff; the result depends upon the number of players and the marginal cost of influencing the probability of winning. Thus, it cannot be assumed, as first thought, that a given rental payoff will give rise to wasteful expenditures of equal value.