Abstract
AbstractWe analyze the distributional effects of rent‐seeking via the financial sector in a model calibrated to US data. Rent‐seeking implies a misallocation of resources that increases wealth inequality among non‐rent‐seekers and for the whole economy. A deterioration in institutional quality implying more rent‐seeking leads to welfare losses for non‐rent‐seekers, especially for those with higher earnings and initial wealth, because they are most affected by the deterioration of the aggregate economy. On the other hand, welfare gains are larger for rent seekers with higher earnings and wealth, who have an increased resource extraction capacity.
Highlights
The importance of institutional quality for economic outcomes is widely accepted (see e.g. North (1990), Hall and Jones (1999), Rodrik et al (2004), Acemoglu (2009) and Acemoglu and Robinson (2019))
We focus on rent seeking related to the ...nancial sector2 because ...nancial markets are central in the transmission of earnings risk to wealth inequality, and because of the importance of ...nancial markets in modern economies, in general, and in terms of rent extraction, more speci...cally (e.g. Philippon (2012) and Mazzucato (2018))
Notice that here we examine whether ...nancial rent seeking is a mechanism which ampli...es the e¤ect of earnings inequality on wealth inequality, and we do ...nd that there is a positive relationship between rent seeking and wealth inequality, we do not propose that it is rent seeking that explains the levels of wealth inequality that we observe in the data
Summary
The importance of institutional quality for economic outcomes is widely accepted (see e.g. North (1990), Hall and Jones (1999), Rodrik et al (2004), Acemoglu (2009) and Acemoglu and Robinson (2019)). We answer these questions quantitatively, by calibrating the model to the U.S.A., for a base level of institutional quality that allows for 1% of aggregate savings to be extracted via the rent seeking competition This calibration implies that the labour misallocation that is due to rent seeking intermediation, via the lobbying sector, absorbs 3.5% of the labour force, which is about half of the share of the labour force that works in "Legal occupations" and "Business and ...nancial operations".4. We ...nd that at the individual level or equivalently in partial equilibrium, weaker ...nancial institutions and higher rent seeking imply lower wealth inequality (Figures 2-4) The intuition behind these e¤ects is that returns to savings are increased at the level of the individual household, who does not internalise the e¤ects of his/her own rent seeking on aggregate outcomes, and rent seeking opportunity works e¤ectively as a way to improve self-insurance. In an Appendix, we present a simple example with analytical solution to aid the presentation of the intuition behind the relationship between rent seeking and wealth inequality in general equilibrium
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