Free entry and efficient rent seeking

  • Richard S. Higgins
  • William F. ShughartII
  • Robert D. Tollison

Abstract

This paper concerns rent seeking and the extent to which rents are dissipated under various circumstances. Gordon Tullock’s (1967) insight that expenditures made to capture an artificially created transfer represent a social waste suggested that the cost to the economy of monopoly and regulation is greater than the simple Harberger (1954) deadweight loss. Indeed, under Tullock’s original formulation and in the extensions of his work by Krueger (1974) and Posner (1975), rents are exactly dissipated at the social level ($1 is spent to capture $1), so that the total welfare loss from such activities is equal to the Harberger triangle plus the rectangle of monopoly profits.

Keywords

Federal Communication Commission Rent Seeker Monopoly Rent Active Rent Seeker Rent Dissipation 
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Notes

  1. 1.
    In a recent paper, Corcoran (1984) raises several of the same points about Tullock’s analysis which we independently noted, and which are set out in the remainder of Section 2. He suggests, for example, that bidders will enter until in the long run the expected payoff from playing the game is just equal to the return realizable from alternative investments, and that in equilibrium, the number of contestants depends only upon the value of the parameter, R, which in Tullock’s model represents the structure of marginal costs facing the participants. Corcoran goes on to state, correctly, that aggregate rent-seeking expenditures will in the long run be invariant with respect to R. What Corcoran fails to note (and what Tullock, 1984, shows suspicion of, but does not fully demonstrate in his comment) is that for the zero-profit result to make sense, R must be restricted to the interval (1, 2). Where we differ from Corcoran is in our development of a more general approach to the question of rent dissipation under conditions of free entry (see Section 3).Google Scholar
  2. 2.
    The number of potential rent seekers is fixed in our model. We do not analyze the decision to be among the pool of potential rent seekers.Google Scholar
  3. 3.
    Thus, our rent-seeking model is analogous to Shubik’s (1959) game-theoretic model of oligopoly in which firms in-being are distinguished from active competitors.Google Scholar
  4. 4.
    The major exception is Corcoran (1984); see note 1. One may question whether equilibrium is the appropriate restriction to apply to the problem of rent seeking for a known monopoly right. Consider Frank Knight’s example of the California gold rush. Overinvestment occurred in that case because no one entrant could possibly determine how many others would attempt to stake claims. Admittedly, our model requires that all players have this type of information, but we think that the assumption is justifiable on the ground that it permits us to derive testable implications about the determinants of rent-seeking activity.Google Scholar
  5. 5.
    If the license is perfectly durable, L reflects the discounted value of the flow of rents in perpetuity. On the other hand, if there is some positive probability that the rents will be expropriated in the future, this will reduce the present value of the license. The exact nature of the license right in this regard is immaterial to our results.Google Scholar
  6. 7.
    Obviously, if U* were not independent of m, Er would depend on m in a more complex way.Google Scholar
  7. 8.
    Alternatively, we might have supposed the N rent seekers to make a joint effort and entry decision. We have not worked through the implications of such a model.Google Scholar
  8. 9.
    The drop-out decision would have to be modeled in the same way as the initial decision to enter. The drop-out game would be played repeatedly until the expected return to effort in the contest was nonnegative for the remaining players. Thus, for all m for which expected net return over variable cost would be negative, Ea will be limited to the loss of fixed cost.Google Scholar
  9. 10.
    Expected cost is not simply pC* because when there is only one active participant, no effort needs to be expended. The probability that a particular individual incurs only cost a is (1−p)N−1. The probability that a particular individual is not the only active rent seeker and thereby incurs cost C* is 1−(1 −p)N−1.Google Scholar

Copyright information

© Springer Science+Business Media New York 2001

Authors and Affiliations

  • Richard S. Higgins
    • 1
  • William F. ShughartII
    • 2
  • Robert D. Tollison
    • 2
  1. 1.Federal Trade CommissionUSA
  2. 2.Center for Study of Public ChoiceGeorge Mason UniversityFairfaxUSA

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