Non-market Allocation and Rent Seeking

Abstract

In the real-world scenario, we encounter many transactions involved with non-market allocation of resources, including quota system, regulated price, lottery system, first-come-first-serve basis, and restricted licensing. Although it is argued that price mechanisms can best ensure the efficient allocation of scarce resources, non-price distribution methods are adopted where markets are absent to price a particular goods or service, or it is extremely costly to arrange the price mechanism. Although non-market mechanisms are often well-meaning, being designed to achieve ends that are thought to be socially desirable, such interventions often generate by-products, including bribery and corruption, which the regulators might easily overlook. This chapter discuses these issues in detail. It is shown that non-market mechanisms in a weak state tend to increase competition between and among various economic agents, who compete to capture rent created by non-market systems. As a result, the allocation remains economically unproductive. Moreover, this distributive system has been maneuvered to achieve political gains instead of ensuring economic efficiency. Cases are illustrated to provide supporting evidence to this hypothesis. The cases show that non-market allocation is economically damaging if the power of the state is weak and rent seeking is perverse.