Technological Progress and Rent Seeking

Abstract

We model firms' allocation of resources across surplus-creating (i.e., productive) and surplus-appropriating (i.e., rent-seeking) activities. Our model predicts that industry-wide technological advancements, such as recent progress in data collection and processing, induce a disproportionate and socially inefficient reallocation of resources toward surplus-appropriating activities. As technology improves, firms rely more on appropriation to obtain their profits, endogenously reducing the impact of technological progress on economic progress and inflating the price of the resources used for both types of activities. We apply our theoretical insights to shed light on the rise of high-frequency trading.

Keywords: Resource Allocation, Surplus Appropriation, Misallocation, Economic Growth, Market Making, Electronic Front-Running.

JEL Classification: D21, D24, O33, O41