Rent Seeking Activities and Aggregate Economic Performance the Case of Greece

Abstract

We built upon Angelopoulos et al. (2009) and we employ a dynamic general equilibrium model in order to examine the interrelated role of rent seeking activities, institutions and government policy variables, like tax rates and public spending, on Greece’s economic performance during the last fourty years. We focus on the period 1979-2001. According to Kehoe and Prescott (2002, 2007) this period can be characterized as a great depression. The model is the standard neoclassical growth model augmented with a government sector and an institutional structure which creates incentives for optimizing agents to engage in rent seeking contests in order to extract rents from the government. This behavior creates a cost to the economy in the form of an unproductive use of resources. Our main findings are as follows: First, in terms of the path of key macroeconomic variables, our model fits the data quite well. Second, by conducting a growth accounting exercise we find that during the period 1979-1995 a non negligible proportion of the decline of total factor productivity (TFP) can be accounted for rent seeking activities. Third, our model produces an index which can be interpreted as a measure of the quality of institutions in the Greek economy. Our model based index exhibits a resemblance with the internal country risk guide (ICRG) index which is widely used in the literature as a proxy for the quality of a country’s institutions.