Efficiency and Equity: A General Equilibrium Analysis of Rent-Seeking

We study the rent-seeking phenomenon using a simple, static general equilibrium model. The economy consists of two sectors, both employing constant returns-to-scale technology with labor as its sole input. One sectors is monopoly, where continuum agents compete for share monopoly profits (i.e. rent). Agents are heterogeneous in productivity and ability: they face choice between engaging (productive) work or vying rent contest against other rent-seekers). At aggregate level, reduces available amount thereby lowers output welfare (rent-seeking inefficient). individual shifts income towards rent-seekers. Consequently, an few rent-seekers tends to have high inequality: effect that exacerbated by fact decreasing number (low levels increase inequity). This tradeoff efficiency equity primary focus this paper. investigate how distribution ability correlation shape tradeoff.