Rent-Seeking Competition from State Coffers in Greece: A Calibrated DSGE Model

Abstract

We incorporate an uncoordinated redistributive struggle for extra fiscal privileges and favors into an otherwise standard dynamic stochastic general equilibrium model. Our aim is to quantify the extent of rent seeking and its macroeconomic implications. The model is calibrated to Greek quarterly data over 1961:1-2005:4. Our work is motivated by the rich and distorting tax-spending system in Greece, as well as the common belief that interest groups compete with each other for fiscal privileges at the expense of the general public interest. We find that (i) the introduction of rent seeking moves the model in the right direction vis-a-vis the data (ii) an important fraction of GDP is extracted by rent seekers (iii) there can be substantial welfare gains from reducing rent seeking activities.