Seeking Rents in the Shadow of Coase
37 Pages Posted: 13 Jul 2006 Last revised: 30 Mar 2011
Date Written: November 20, 2008
In this paper, we study a two-stage rent-seeking game. In the first stage, contestants compete a-la-Tullock; in the second stage, the winner can resell the rent a-la-Coase. We consider a complete information Tullock game in which the contestants have different valuations for the rent. The analysis focuses on the ex ante effects of a secondary market on efforts, payoffs, rent-dissipation and rent-misallocation. We show that the secondary market, while correcting possible misallocations, may exacerbate rent dissipation. In some situations, the increase in rent dissipation more than offsets the allocative advantage, so that a secondary market might reduce welfare. We further show how the effect of ex post tradeability on welfare depends on the parties' bargaining power and valuations of the rent, also considering the case of endogenous bargaining power.
Keywords: Rent-seeking, asymmetric rent valuations, rent-dissipation, rent-misallocation
JEL Classification: C72, D72
Suggested Citation: Suggested Citation