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Rent Seeking, Market Structure and Growth

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  • Daniel Brou
  • Michele Ruta

Abstract

We construct a model where firms compete in both political and economic markets. In political markets, firms compete for influence over government transfer policy (rents). This activity can be beneficial for the firm, but is purely wasteful from the point of view of society because resources are utilized to achieve a redistribution of income. In the economic market, firms compete for market share through cost reducing technological innovation. Market structure plays an important role in this economy because competition drives firms to invest more in innovation resulting in higher growth. Rent-seeking affects economic growth in two important ways. It diverts resources away from innovation and it affects the number of firms that are supported in equilibrium. The former has a negative effect on growth while the latter effect is ambiguous, depending on whether rent seeking induces entry or exit. This market structure effect depends on a combination of political and economic factors that the theory highlights.

Suggested Citation

  • Daniel Brou & Michele Ruta, 2007. "Rent Seeking, Market Structure and Growth," Economics Working Papers ECO2007/03, European University Institute.
    • Handle: RePEc:eui:euiwps:eco2007/03
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    Cited by:

    1. Tan Ngoc Vu & Duc Hong Vo & Michael McAleer, 2019. "Rent seeking for export licenses: Application to the Vietnam rice market," Documentos de Trabajo del ICAE 2019-13, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    2. Júlio, Paulo, 2014. "The politics of growth: Can lobbying raise growth and welfare?," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 263-280.
    3. Ben J. Heijdra & Pim Heijnen, 2021. "Efficiency and Equity: A General Equilibrium Analysis of Rent-Seeking," CESifo Working Paper Series 9375, CESifo.
    4. Ben J. Heijdra & Pim Heijnen, 2023. "Rent Seeking, Capital Accumulation, and Macroeconomic Growth," CESifo Working Paper Series 10771, CESifo.
    5. Yonghong Ma & Huili Ni & Xiaomeng Yang & Lingkai Kong & Chunmei Liu, 2023. "Government subsidies and total factor productivity of enterprises: a life cycle perspective," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(1), pages 153-188, April.
    6. Yu‐Bong Lai, 2020. "Rent‐seeking, R&D, and productivity," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(4), pages 404-419, September.
    7. Xu, Ronghua & Shen, Yuxin & Liu, Meng & Li, Lu & Xia, Xuehua & Luo, Kaixin, 2023. "Can government subsidies improve innovation performance? Evidence from Chinese listed companies," Economic Modelling, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Rent Seeking; Market Structure; R&D Investment; Growth; Welfare;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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