Rent-seeking, Occupational Choice and Oil Boom

This paper examines choice of occupation between productive activities and rent-seeking in an oil-dominated economy where oil rent is the major source of public revenue. Three regimes can occur: no rent-seeking, coexistence of rent-seeking and of productive activity and full rent-seeking. The economy may get trapped in each regime unless it shocked by a substantial change in exogenous parts of reward structure. In particular in the latter case the extraction and liquidation of oil is the only productive activity. Oil boom in general rewards both productive and unproductive activities unequally and hence affects occupational choice. We identify situations where boom favours misallocation of talent and the extent of diversion that boom induces dominates its income effect. Our model also captures voracity effect where fiscal transfers grow more proportional than the size of windfall itself. Boom may however cause changing of regime from coexistence of both activities to full rent-seeking even when the voracity effect is not operative. In this case boom has a permanent effect and its aftermath persists even when the oil rent returns to its pre-boom level.