Rent Seeking, Market Structure and Growth

Daniel Brou, University of Western Ontario
Michele Ruta, World Trade Organization

Abstract

We study the role of productive and unproductive entrepreneurship in economic growth in a setting where firms compete in both economic and political markets. Specifically, firms compete for market share through cost reducing technological innovation and vie for influence over government transfer policy through rent seeking activities. We find that rent seeking affects growth in two ways: it allows firms to ignore economic competition, leading to less innovation, and alters the number of firms that are supported in equilibrium. The former effect is negative while the latter is ambiguous. We show how these effects depend on various characteristics of economic and political markets.