rent seeking and the provision of public goods

8/9/2019 Rent Seeking and the Provision of Public Goods

1/9

Rent Seeking and the Provision of Public Goods

Author(s): Mark GradsteinSource: The Economic Journal, Vol. 103, No. 420 (Sep., 1993), pp. 1236-1243Published by: Wiley on behalf of the Royal Economic SocietyStable URL: http://www.jstor.org/stable/2234249 .

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2/9

The Economic ournal,

103

(September)236-I243.

?

Royal Economic

Society I993. Published by Blackwell

Publishers, io8 Cowley

Road, Oxford OX4 iJF, UK and 238 Main

Street, Cambridge, MA 02I42, USA.

RENT SEEKING AND THE

PROVISION OF PUBLIC

GOODS*

Mark Gradstein

Public good provision is a

typical example

of market

failure, having served

as

an

argument

for

government

intervention since

the

time of

John

Stuart

Mill

(In Principles fPoliticalEconomy, ook V, Chapter

XI).1 Many economists were

quick

to

recognise

the limits

of

government

intervention and the

corresponding

causes of 'intervention

failure'. One

of

these causes has to do with the

observation that for reasonssuch as pressure by interestgroups (Becker, I983,

i985),

wasteful rent seeking (Tollison,

i982),

legislative failure (Fiorina and

Noll,

I

978),

and

others,

the

government

is

unlikely

to

act

purely

in

the

interests

of the

public.

These

factorsquestion the validity

of

the benefits of

government

intervention relative to decentralised provision. To

resolve

the

ambiguity

pertaining

to welfare

enhancing possibilities

of

intervention,

it

is

interesting

to

depart

from

models

in

which the

government

is

represented

in

a

purely

benevolent manner and

introduce some realistic features into the

underlying

political process.

This

approach

has been

emphasised

in

the

writings

of

the

public

choice scholars

(see, e.g. Buchanan,

i968,

and Buchanan and

Tullock,

I962). Pursuing this line of

inquiry, a related recent paper (Gradstein, I992)

presents

a

preliminary analysis

of

the effect

of

incomplete

information on the

welfarecomparison

between public and private provision of public goods. The

results are quite

surprising: sometimes, even

an extremely uninformed

government performs well

(and frequently even better) relative

to

the

voluntary action of

uninformed individuals.

Incomplete information

is

only

one

among several

reasons

for

the possible inferiority of intervention.

An

alternativelikely reasoninvestigatedin this paper is non-benevolent behaviour

of the

government.

In

this

study,

I

adopt the public choice school

paradigm

of

modelling the

government

in

order

to

compare

its

performance

with that of the market

in

the

standard model of

the

provision

of

public goods. Specifically,

I consider an

economy

consisting

of

jurisdictions

which

provide

local

public goods.

Private

provision

is

represented by the Cournot-Nash

equilibrium

in

individual

voluntary

contributions towards the

provision

of

public

goods,

whereas

public

provision entails

influence costs. Specifically, it is assumed that levels

of the

public goods are determined by rent seeking activities, e.g. lobbying. Thus,

both

allocation

procedures

yield inefficiency,

and the

question

is

which

procedure results

in

a

greater

amount of

inefficiency: private provision

with its

free

riding

incentives,

or

public provision

with its rent

seeking

incentives. The

*

I

would like to thank

two referees

and the

editor, John Hey,

for

their

helpful

comments

and

guidance.

Financial

assistance from the Monaster Research Center is also

gratefully acknowledged.

1

The

public goods

that

we

have in mind are

characterised

by

the absence

of

rivalry

in

consumption;

in

the

particular example presented

here

they

are

pure

local

public goods.

[ I236

]


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3/9

RENT SEEKING AND PROVISION OF PUBLIC GOODS

I237

particular modelling adopted is somewhat ad hoc, but nevertheless

provides a

useful frameworkfor the analysis of a

realistic political process by which

public

decisions are

made.

The

results

indicate that

government intervention is

frequently preferred to private provision of public goods. Thus, the

benefits

from improved coordination, which centralisation is likely to bring about, may

exceed the attendant influence

costs. According to the results

obtained,

intervention is advantageous in

large jurisdictions, especially when the number

of these

jurisdictions is small.

In

contrast, private provision can appear

as

welfare superior when jurisdictions are

small,

or

when there are

many

jurisdictions.

I

conclude that

superiority

of

private provision

is not

guaranteed

when the

government displays a forms

of

non-benevolent behaviour.

This

paper takes its perspective from

the growing literature

on

rent seeking,

which

originated

in

the contributions of

Bhagwati (I982), Krueger

(I974),

Posner

(I975)

and Tullock

(I967, I980).

Recent years have witnessed an

increasing interest

in

the subject, as can be illustrated by many studies such

as

Applebaum

and Katz

(1986 a, b),

Hillman

and Katz

(i

984), Katz etal.

( I990),

Nitzan

(i

99

i),

Tollison

(i 982), Ursprung

(

1990).

The

papers of

Katz et al.

( I990), Nitzan (i

99

i), and Ursprung

(

I990) are especially relevant since

they

touch on

the public good aspect of rent

seeking.

The

present contribution can

be considered as an

extension of

their

analyses.

The

novelty

here is

in

presenting

a welfare

comparison

of

two imperfect allocation systems, whereas

the above studies

are

mainly

concerned

with

the extent of

rent

dissipation

in

the

context

of rent

seeking

for

pure

public goods.

I.

DESCRIPTION OF

THE

ECONOMY

Consider an

economy

with

N

=

kn

individuals,

where

k,

k

>

2,

stands for the

number of distinct

jurisdictions, each

of

which is populated by n identical

individuals. There are two types of goods

-

private and public.

Each

individual's initial endowment of the private good is w, and the initial

amount

of the

public goods

is zero.

kjurisdiction-specificpublic goods

can be

produced.

The

production function of each of these goods is assumed to be a

linear

function

of

the

average private good

contribution

in

each

jurisdiction,

a

common

assumption

in

situations where the

population

size is allowed to

vary.

Letting

xi

denote the

amount of contribution made

by

individual

i

to

public

goodj,

and

X,

-

the

amount

of

public goodj,

the

assumption

on the

production

function can be written as

Xj

=

Yi

x0j/n.

Each

jurisdiction

is characterised

by

a different

public good

that the members

of

the

jurisdiction prefer.

In

particular,

the

utility

function of

individual

i

which is identified

with

jurisdiction j (henceforth referred to as individual ij) is assumed to be

quasilinear,

that

is,

v(Xj)

+yi,,

where

yij

is the amount of that individual's

private consumption.

I

make

the

following assumptions

on

v: v'

>

o,

v

<

o,

v(o)

=

o, v'(o)

=

00, v'(oo)

=

O.2

All

these

assumptions

are

quite

standard

-

see

Cornes

and

Sandler

(I986).

Note that the

public goods

here are local

public

goods,

one

possible interpretation

being

in

terms of a

geographical separation

2

This

particular

form

of

utility

function

is

adopted

for

simplicity

of

presentation.

?

Royal

Economic

Society

I993

42

ECS 103




4/9

I238

THE

ECONOMIC JOURNAL

[SEPTEMBER

among

districts populated by competing

constituencies.3This model is

similar

to that of

Ursprung (I990) who

is

also interested in

the political economy of the

provision of

local public

goods.

Pareto efficiency requires maximisation of a

representative individual's

utility

function, v(Xj)

+yi,

subject to the

resource constraint,

knyi1

k(nX,)

-

knw

=

o,

which

yields

E '-1(I)

XE.

(I)

The

Pareto optimal amount

of each good is independent of the population

size

because

of

the

assumptions

made

on

the

production technology.

The

symmetric

Pareto

optimal

allocation

yields

an

individual

utility

of

uE

=

V(XE)

+W_XE. (2)

I

now turn

to the welfare

analysis

of

private

and

public provision

of

public

goods.

II.

WELFARE COMPARISON BETWEEN PRIVATE AND

PUBLIC

PROVISION

OF PUBLIC GOODS

This

section presents

an

analysis of private

provision, public

provision,

and

then performs

a

welfare

comparison between the two. Private

provision is

represented by a Cournot-Nash equilibrium in individual voluntary con-

tributions

towards

the

provision

of

public goods.

The

public provision requires

each

individual

to

participate

in the

provision

of each

public good

on an

equal

basis,

that

is,

the individual tax shares are

equal.

The amount

of

each of

the

public goods produced

is then

determined via

a

lobbying

process,

the details

of

which are

specified

below.

II.

I.

Private

provision

In

the Cournot-Nash

equilibrium

of

the

voluntary

provision

of

public

goods,

individual ij chooses (x0,

ye),

so as to maximise v(X1)+yU, subject to x

+yij

=

w.

(Note

that

an

individual

residing

in

localityj

will

not

make

any

contribution

to

public goods

other

thanj.)

The

Cournot-Nash

equilibrium

amount of

public

good j,j=

I,...,k,

is

seen to be

X;7N

=

vU'

(n)

=

XCN.

(3)

This

amount

decreases

in

n

because

of the free

riding

incentives and is smaller

than

the

socially optimal

amount,

v'1

(I).

The

equilibrium utility

level of each

individual in a symmetric equilibrium is

u

N

=

V(XCN) +w-XCN

Its

derivative with

respect

to

n

is

[VI

(XCN)

-

I]

(dXCN/dfl)

=

(n

I)/lvf(XCN)

<

o,

hence,

this

utility

decreases with

respect

to

the

jurisdiction

size.

3

Some authors (e.g.

Fiorina and Noll

(I978),

and Weingast et al.

(I98I))

have argued that

geographical

separation is likely

to

result

in a political failure due to the pork barrel politics

generated by geographically

based constituencies. Their argument,

however,

is only distantly related to rent seeking.

?

Royal

Economic

Society

I993




5/9

I993]

RENT

SEEKING AND PROVISION

OF PUBLIC GOODS

1239

II.2.

Public provision

In

this

section

I assume that members

of group

j

are compelled

to

participate

on

an

equal basis

in

the provision

of each of the public

goods

that will be

produced in the economy so that individual gs tax share is

i

/kn.

This

assumption

may reflect the

idea that

income tax is used

to finance

the public

goods,

and that individuals

who

earn the same income

are taxed the same,

or

it

may

reflect some other

equity considerations

of

society.

The level of each

of

the public goods

that

gets

to

he

produced

in the economy is determined

by

jurisdiction

lobbying.

Based on this premise, I depart

from the standard

public

goods

literature

in

which

rent

seeking

efforts

or

other 'wasteful'

activities are

absent.4

The incorporation

of

some types

of socially 'non-optimal'

behaviour,

however, may sometimes

better represent the

realistic political

situation.

As is common

in

the rent seeking

literature,

I adopt a particular

function

form which

transforms individual

lobbying

to the distribution

of the tax

burden.

Specifically,

the

probability

p1

that

public

good

j

will

be

produced

is

a function

of the

lobbying

efforts

of group j

relative

to

the total amount of

lobbying. Letting

zU denote the amount

of lobbying

of individual ij,

and

Z1

the

amount

of

lobbying

of

group

j

as a whole,

we have

p1

=

ZJ/Z,

where

Z1

=

Ei

zU,

and

Z

=

Yj

Z1.Public provision

can be

conceived as

a

two stage

game,

the

first stage

of which

is the rent seeking competition among

the

jurisdiction,

and

the second stage is the optimal choice of the victoriousjurisdiction. Proceeding

backwards,

let XArSdenote

the amount

of

public good

j

which

is

optimal

from

the

viewpoint

of

groupjs

members;

the

optimal

level

of

public

goods

other

than

j

from the viewpoint

of these individuals

is

o. (Recall

that a winning group

in

the rent seeking contest

is

entitled to set the

level

of

the

public goods

in

the

economy.)

Assuming

an internal

solution,

XjRS

maximises

v(Xj) +

w

X/k and

is

given

by

XsR

'

/k(

X;s=

Vt-

(I /k)

.

(5)

This is

the amount of public good

j

provided

if

localityj

wins the

rent

seeking

contest; no other public goods are provided in this case. This amount is an

increasing

function

of

k.

The

amount

of a

public good

which

gets

to

be

produced

in

a

victorious jurisdiction

is

larger

than the

efficient one,

and the

amount

of

public

goods produced

in

other

jurisdictions

is less than

what is

required

by social

optimality.

The

expected

utility

of

group

js

individual

member

is

Uj=

p1v XRs)

+w-XjRs/k-z0y.

The amount of

lobbying

is determined

as

a Nash

equilibrium

of

the

resulting game

in

which

individual

zj

seeks

to maximise

his

utility by choosing zU

>

o. Assuming

existence

of

an interior

symmetric

equilibrium,

this

equilibrium

is

characterised

as follows:

V

(XjRJ)

apJ/ZiI

=

0

(6)

or

v(XRS

)Z-Z,/Z2

= I,

j=

I,

...,k.

(7)

4

See

Katz et al.

(I990), Nitzan (i99i),

and

Ursprung (I990),

for related public

goods

models

incorporating

rent seeking.

These

authors do not attempt

to provide welfare comparisons

of the

kind

performed

in

this paper.

?

Royal

Economic

Society I993

42-2




6/9

I240

THE

ECONOMIC JOURNAL

[SEPTEMBER

Summing

up the

above k

equations

we

obtain

v(Xjs)

(k-i)/Z=

k

(8)

from

which it follows

that the equilibrium

amount

of rent

seeking

efforts

s

Z

=

v[v'-'(

1k)]

(k- i)/k, and the individual rent seeking effort is ZIN =

v[v'-'

(i/k)

]

(k i)

Ink2.

See

also

Katzet

al.

(

I990)

for

thederivation

f

Z.)

This

yields

the

following

level

of an individual's

welfare:

uRS

=

V(XRS)/k+w

-XRS/k-v(XRS)

(k-

)Ink,

(9)

where

XRS

v'-'

(

i/k).

To

ensurean

internal

solution,

URS

must

be

larger

than

w, otherwise

the jurisdictions

would do

better by

not producing

the public

goods

at

all. Hence,

v(XRS) XRSV(XRS)

(k- i)/nk >

o.

(Io)

The

individual's

welfare

is seen

to increase

in

n. This

is the case because

when

jurisdictions

are

more populous,

individuals

in each

jurisdiction

tend to

free

ride

on the rent seeking

efforts

of other

members

of the jurisdiction,

which,

in

turn,

enhances

efficiency.

Furthermore,

duRS

v(XRS)_XRS

v(XRs)

k-2

[v

(XRS)I

f(XRS\

k-

i

dXRS

dk

k

+

n k3 k

v ()

nk2J

dk

where the sign

follows from (i

o).

This,

in

turn,

implies

that

URS

decreases

n

k,

that is, the numberof competingjurisdictionsis adverselyrelated to welfare.In

any

case,

however,

uRS

<

UE, that

is rent seeking

is indeed

socially

wasteful.

II.3.

Privateversus

ublic

provision

Recalling

(4)

and

(9)

the welfare

difference

between public

and

private

provision

of public goods

is

given by

v(XRS)/k-XRS/k

v(XRS)

(k-

i)/nk2

_

V(XCN)

+ XCN.

(II)

Since

URS

is

an

increasing

function

of

n,

and

uCN is a

decreasing

function

of

n,

the expressionin

(i i)

is an increasing function of the population size, which

implies,

once again,

that

public

provision

is welfare

enhancing

relative

to

private

provision

in

a large

economy.

It

follows

from

(3)

that

as

the

jurisdiction

size increases

to infinity,

XCN

decreases

to

zero. This,

in

turn, implies

that

as

n tends to infinity,

(i i)

tends to

[V(XRS)

-XRS

]/k > o, that

is,

when

the

group

size is sufficiently

large, public

provision

always performs

better

than private

provision

does.

Since

URS

is a decreasing

function

of k, and

uCN s a

constant

function

of

k,

it follows

that the larger

the number of

interest groups,

the better

private

provision

performs

relative

to public

provision.5

I

conclude

with

an

illustrative

example,

Let

v(X)

=

Xx,

o

<

ac

<

i.

Then

XE

-

(i/ac)i/(xi),

XCN

=

(n/cx)i(6-x),

and

XRS

=

(il/kac)

(`1); v(XCN)

=

(n/1a)x(x-1)

and

V(XRS)

=

(i

/kx)x/(X-1).

Sub-

stituting these

values

into

(ii)

we can numerically

calculate

the

welfare

difference

for selected

values

of

parameters

oc, k,

and

n.

The

results

are

5 Comparative

statics

of the effect of

n and

k on the extent of

rent dissipation in

a related

but different

contextare presented

n Katz

et al.

(I990)

and Nitzan

i99i).

? Royal

Economic Society

I993




7/9

I993] RENT SEEKING AND PROVISION OF PUBLIC GOODS

I24I

Table

I

Thewelfare ifferentialetweenrivate rovision ndpublicprovision fpublicgoodswith

influencectivityoverwhich ublicgoodtoproduce boldnumbersepresentreferenceor

thepublicprovision)

k\n IO

Io2

I03 I04 Io5

a

=

O-I

2 - 0279 -0-I32

-0-025

oo56 O-II9

3 -o0408 -0-262 -0-I55 -0?074

-OOII

4 -0o473 -0 329 -0o224

-0-I43

-o-o80

5

-05I5 -

0373 -0-267 -oi86 -0-I23

as

=

0-2

2 -0-I50 0025 O-II9

0172

0'201

3 -0o27I

-o-o96

-o0002

0

050

o

o8o

4 -0?340

-o

i66 -0o072 -o0020

0010

ao

=

03 2 - 0075

0-076

0130

01-49 0-I56

3

-

0-206

-

os53

0001

0-020

o0o28

0

04 2 -0-048

0o059

o-o8i

o-o83

oo86

*

The parameters are chosen so as to ensure positive public levels in the public provision case.

presented

in

Table i. This table vividly illustrates our general conclusions,

namely, that private provision is preferable when jurisdictions are small, and

public provision performs

better when there is a small number

of

large

jurisdictions.

III. DISCUSSION AND EXTENSIONS6

Some

assumptions

made

in

this

paper

deserve

a closer look as

they

are the

driving

force

behind

the

results.

First,

there is the

assumption

on

strictly

non-

cooperative

behaviour

of

individuals

-

both

in

their

private provision

of

public

goods

and

in

their rent

seeking

efforts. Were more

'cooperative' equilibrium

concepts

used,

private provision

would

become more

attractive

and

public

provisionmore wastefulsince free riding varies negatively and rent dissipation

varies

positively with cooperative

behaviour.

In

the context

of

private

provision of public goods, several attempts have been made to model the

individual's behaviour

in

a

more

cooperative way than is suggested by

the

Cournot-Nash

paradigm

-

see, e.g. Sugden

(i

984)

for one such

alternative

equilibrium concept.

A

related

line

of research

in

the

public goods

literature

departs

from

the neoclassical tradition

by assuming

that

individuals

make their

contributions to the

provision

of

public goods partly

because of

'egoistic'

motives,

that

is, they

derive

utility

from the act of contribution

as well as from

private and public goods

-

see, e.g. Andreoni (I989)

and

references therein.

Proceeding along

these lines

may

also

increase

the attractiveness

of

private

provision, especially in those circumstances where the 'egoistic' motive is

relatively important.

It is

equally plausible

to

approach

rent

seeking

with the

aid

of

some

kind of

cooperative equilibrium concept

since

lobbying

is

usually

done

by

a

relatively

small number of

(sometimes

well

organised

and

disciplined)

groups

of individuals

-

see Olson

(I982)

who

stresses

the

importance

of the

interest

groups' organisation

for economic

growth.

6

This section has been

inspired by

the referee's

remarks.

?

Royal

Economic

Society

I993




8/9

1242

THE ECONOMIC JOURNAL

[SEPTEMBER

Another

possible extension is to

represent

rent seeking as lobbying

over

shares

of

the public good

(as

in

Ursprung

(I990)). For example,

suppose that

the government

sets the

amount of public good provision, whereas

individuals

attempt

to affect the

distribution of the tax

burden. More precisely,

an

individual's share in public good provision can be affected by rent seeking

individuals with the

assumption that

the individual's tax share

is a decreasing

function

of

his own

lobbying and an increasing

function

of lobbying by others.

A

preliminary

analysis

done by the author

along these lines

indicates that our

main conclusions are

unaffected. A more promising

possibility

is to assumethat

individual

rent seeking

efforts are, at least, partly

an input

in

the provision

function

of

the public

good, as was suggested

in

a related context by Long

and

Vousden (I987).

This seems to be an interesting

line of research

to

pursue

in

future work.

Finally, relaxing the

assumption

of identical individuals may

yield interesting

results as to the effect

of heterogeneity

in

initial wealth

on the welfare

comparison

between

private provision

of

public goods

and

public provision

with

rent

seeking.

In this

case,

both outcomes could

also be

compared

to that

attained by direct voting,

where the

median voter

is

pivotal

in

determining

the

final allocation

of resources.

IV. CONCLUDING

REMARKS

The

main

objective

of this

paper

is

to

approach

the issue

of

government

intervention

in the provision of public

goods

from a positive perspective,

by

introducing

some realistic features

into the underlying political process.

Following the paradigm

developed by the public

choice

school, this study

is

based

on

the

presumption

that

public provision

of

public goods

entails wasteful

rent seeking.

The results

supplement those of

a related work (Gradstein, I992)

which

contains a

preliminary

discussion

of

the

comparison

of

private

and

public provision

of

public goods

when the

government

is uninformed.

In both

cases, public provision frequently outperforms private provision in large

economies.

The amount

of

inefficiency generated by

rent seeking

incentives

is

much smaller here than

in the

context

of rents having

the nature

of

private

goods.7

The

presented

model

illustrates, therefore,

that

in

the case

of

public

goods provision,

rent

seeking

behaviour

does

not

necessarily

impair

the welfare

enhancing potential

of

centralised

intervention.

Ben Gurion

University

Date

of receipt

ffinal

typescript:

March

993

REFERENCES

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7

Since

public provision

is nevertheless inefficient

because

of influence activities,

the ideal

form

of

organisation

would probably try

to minimise them

by either

legal or economic disincentives.

Almost

universal

existence of the aforementioned

activities

hints at the

unavoidable difficulties

nvolved

in designing

the appropriate

disincentive

system.

K

Royal

Economic

Society

I993




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