Monday, June 18, 2007

Dynamic Rent-Seeking

We're back! Comprehensive exams put a hiccup into the blog process, but now that I'm (hopefully) done with those things for the rest of my life, there shouldn't be any more 6 week gaps.

Here's an issue I've been wrestling with for the last couple of days. We know rent-seeking as the process of devoting resources to gaining political favors. People would be willing to spend up to the amount that they would gain from said favor to win the policy change. Nothing new here.

A discrepancy arises in the literature concerning the permanence of laws and how this may affect the amount of rent-seeking we observe. Landes and Posner show that a more independent judiciary creates a more stable policy environment in the sense that laws would persist longer. This would, in turn, create more valuable laws (via a longer horizon to glean rents from a policy change), and we would then observe more rent-seeking.

Randy Holcombe comes to a different conclusion. In his pursuit of creating a tax system that would minimize political costs (such as rent-seeking), he puts forth that tax codes should constitutional so they would be more difficult to change. This permanence, he says, would reduce the level of rent-seeking.

Something has to give, right?

A couple of thoughts:

- There is a flip side to this that's not being examined; namely, the cost of changing a tax code. If a more permanent law is more costly to change-- which may well be the case-- then there may be a reduction in the amount of rent-seeking. It's an elasticity issue.

The only problem I see with this is that rent-seeking literature almost exclusively ignores this half of the problem. Typically, you look at potential benefits, and groups will spend up to that amount. End of story. Maybe it's not a problem-- maybe it's something that needs to be looked at. But that doesn't seem to mesh well with what's already out there.

- Consider the following thought experiment: Let's say anyone could change the tax code with the flip of a switch. Anyone can change it; the person after you can do so just as easily as you did. How much rent-seeking would happen now? I don't think it's hard to see that there would be zero rent-seeking; it is the permanence of the law that gives it any value in the first place. After all, a zero time horizon doesn't lead to any present value calculations.

For this reason, I'm tending to think that the Landes/Posner position might be a bit more accurate, but I'm certainly not sold either way.

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