Controlling externalities in the presence of rent seeking
نویسنده
چکیده
Contests are a common method to describe the distribution of many di¤erent types of rents. Yet in many of these situations the utilisation of the prize plays an important role in determining agentspayo¤s and incentives. In this paper, we investigate the incentives to expend e¤ort for a prize that produces consumption externalities and consider alternative regulatory policies. We nd relatively more global consumption externalities will increase (decrease) rent seeking when consumption externalities are negative (positive). We show how introducing Pigouvian taxation (possibly with revenue transfer) and Coasean bargaining alters equilibrium e¤ort and payo¤s. Pigouvian taxation tends to reduce both e¤ort and payo¤s whereas this is not always the case for Coasean bargaining. In the presence of suf ciently large consumption externalities, establishing Pigouvian taxation coupled with some element of lump-sum transfer may reduce costly rent seeking e¤ort and improve the welfare of some agents compared to other approaches.
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