Rent-seeking Expenditures Research Articles

CONGESTION TOLLING FOR UNIFORM AND NONUNIFORM DEMAND CYCLES WHEN TOLL-REVENUE BENEFITS ARE DISCOUNTED

rent-seeking expenditures. The striking results derived from their pro- posed modification do not, however, ex- tend to the important class of congestible facilities. This paper explicitly models con- gestible facilities and shows that rent- seeking always dictates lower full- user-cost prices and tolls than those indi- cated by the conventional objective, but the surprising peak-load tolling possibili- ties suggested by Lee and Wilson still ap- ply. It is also shown that rationales for these results are more general than rent- seeking.

Rent-seeking with multiple winners

This paper examines the impact of the number of winners allowed by regulators on rentseeking expenditures. It is demonstrated in a widely used model that an increase in the number of winners will decrease total rent-seeking expenditures. This result is generally obtained regardless of whether the firms are risk-averse or risk-lovers. When regulators award coveted market franchises, there will be smaller welfare losses if more winners are allowed.

The Cost of Rent-Seeking: Evidence from Cellular Telephone License Lotteries

The inventors of the theory of rent-seeking used an analogy with competitive markets to conclude that all monopoly rents would be dissipated in the competition to obtain the property rights to them [23; 29]. Subsequent theorists showed that this conclusion is quite sensitive to assumptions about foresight, risk aversion, conjectures, and bias [15; 21; 30]. Since little quantitative information about actual rent-seeking competitions is available, the theory has developed in an empirical vacuum. In this paper, we attempt to fill that vacuum with an estimate of rent-seeking expenditure by applicants in the Federal Communications Commission's (FCC) cellular telephone license lotteries, held between 1986 and 1989. We go on to compare expenditures with estimates of the value of the licenses at stake. These lotteries constitute a unique natural experiment. Any U.S. citizen was eligible to enter each geographic lottery once, and only once, for an expense which we calculate as modest.' The lotteries were widely publicized and heavily entered. There were over 320,000 applications (one per market) filed for 643 cellular licenses, and third-party application preparers entered the market rapidly. Because licenses were awarded sequentially, prospective participants in later lotteries could find out that expected net returns from earlier lotteries were positive because of undersubscription. The value of the prize was known because sales of previously awarded licenses had begun to take place before later lotteries were held, and market analysts were using such sale prices to value licenses not yet awarded. The later lotteries seem almost optimally contrived to maximize the dissipation of rents. Yet comparing the resources invested in entry (the price of a fully-prepared application) with the rents available (the market value of cellular telephone licenses) shows that dissipation was far short of complete.

More efficient rent-seeking ? A M�nchhausen solution

In the by now standard Tullock model of rent-seeking (Tullock, 1980) fulfillment of the rent-dissipation hypothesis advanced by Tullock (1967) and Posner (1975) is rather the exception than the rule. Using a game-theoretic model, Tullock showed that in non-cooperative Cournot-Nash equilibrium the extent of rent-dissipation crucially depends on the (scale) returns to individual rent-seeking expenditures. His seminal work, in particular the ‘intellectual mire’ (Tullock, 1980) presented by increasing returns to such expenditure (which may lead to non-existence of Cournot-Nash equilibrium) has subsequently attracted considerable attention (see, e g, Hillman and Katz, 1984; Higgins, Shughart and Tollison, 1985; Corcoran and Karels, 1985; Michaels, 1988; and Allard, 1988). While all of these contributions have shed new light on the issue, they did not satisfactorily solve the basic modeling problem, which obstinately kept its status as an `intellectual swamp’ (Tullock, 1985). The present contribution is an attempt to point to a way out of this swamp by questioning the appropriateness of the Cournot-Nash solution concept for Tullock’s original problem. Equivalently, we question the modeling device of having rent seekers move simultaneously.

Collusion and rent-seeking

This paper has explored the possibilities for profitable collusion in rent-seeking games. Anticipated collusion is only profitable for coalitions that approach the size of the grand coalition, while unanticipated collusion is always profitable. By reducing the rent-seeking expenditures of the colluding firms, collusion bestows an external benefit on non-colluding firms. Economies of scale in rent-seeking increase the profitability of collusion, while diseconomies of scale reduce the attractiveness of collusion. When 1 of 3 firms enjoys an incumbency advantage, the total gains from collusion fall as the incumbency advantage rises. Furthermore, 2-firm collusion is more profitable to the colluding coalition when the incumbent colludes with a non-incumbent than when the two non-incumbents collude, whether or not the collusion is anticipated. In all circumstances, unanticipated collusion is more profitable to the colluding coalition than perfectly anticipated collusion. Colluding firms may therefore have an incentive to conceal their collusive activity, even when collusion is legal.

Leadership and expenditures in rent-seeking models

The theory of rent-seeking begun by Tullock (1967), Krueger (1974) and Posner (1975) is now well-established. The analysis of these models typically involves studying properties of the symmetric noncooperative Nash equilibrium defined in terms of pure strategies (rent-seeking expenditures).' In a 1980 article, Tullock first noted and in 1984 later elaborated upon several situations where the traditional Nash equilibrium of equal rent-seeking payments by identical players failed to exist. This failure could arise for two reasons. First, even though the second order conditions were satisfied at the candidate symmetric equilibrium point,2 once at that point, all agents had a (conditional) incentive to choose zero rent-seeking to avoid negative payoffs. Thus the traditional point, while locally optimal (as indicated by the second order conditions), was not globally optimal. The second possible reason for failure was that, at the traditional point, the second order conditions were violated. The problems arise because r, a parameter affecting the (conditional) probability of successful rent-seeking, may be "too large". The principal consequence is that the traditional model with myopic agents does not capture some of the potential behaviour of the players. A particularly worrisome feature is that agents may find it privately optimal to spend (in total) more on rentseeking than the value of the prize. As well, benefits sometimes accrue to agents if they can block entry by preemptive play. Tullock (1984: 97) has conjectured that "there is another game in the precommitment stage, in which the parties attempt to make the first commitment so that no one else will enter". In this paper we consider a two-player noncooperative rent-seeking game where agents are allowed to adopt and potentially benefit from other than a passive stance towards their rivals. Firms must choose to be either leaders or followers and, consistent with that decision and their beliefs about their rivals' strategies, then choose their rent-seeking expenditures. Firms thus have the option of becoming Stakelberg leaders or Stakelberg followers.3 The analysis begins inSection 2. We provide three principal results that serve to characterize the range of possible equilibria. The results critically depend

The Sizes of Majorities

Political parties are analogous to firms. They have incentives to organize and elect leaders in order to maximize the returns to party members from passing legislation. These returns are appropriable and consist of the wage pay and outside earnings of politicians. The former returns come at taxpayer expense, and the latter derive from rent-seeking expenditures by special interests. Politicians, being rent-seekers in their own behalf, compete in elections for the right to supply legislation via majority control of the legislature. So long as there is entry into the party such that any individual may bid for a party position in a primary election, party rents will be capitalized and held by the most efficient set of party members. Like the market, there are no free rents in politics. The majority party controls the legislature through the institutions of majority leadership and proportional representation on committees, and it faces many production and organizational problems common to conventional firms. First, it must find out what is wanted by making some estimate of the demand for legislation. Second, it must organize the legislature so as to supply laws at least cost. Third, it must select leaders to monitor the performance of these activities. Building on this statement of the problem, we develop and test a theory of the efficient size of majorities in this paper.