Rent Seeking and the Provision of Public Goods

Author(s): Mark Gradstein

Source: The Economic Journal, Vol. 103, No. 420 (Sep., 1993), pp. 1236-1243
Published by: Wiley on behalf of the Royal Economic Society
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? Royal Economic Society I993. Published by Blackwell

TheEconomicJournal,103 (September)
I236-I243.
Publishers, io8 Cowley Road, Oxford OX4 iJF, UK and 238 Main Street, Cambridge, MA 02I42, USA.

RENT SEEKING

AND THE PROVISION

GOODS*

OF PUBLIC

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 Principlesof PoliticalEconomy,Book 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 reasons such as pressure by interest groups (Becker, I983,
i985),

wasteful rent seeking (Tollison, i982),

legislative failure (Fiorina and

Noll, I978), and others, the government is unlikely to act purely in the interests
of the public. These factors question 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
welfare comparison 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
alternative likely reason investigated in 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 performancewith 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.
[

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SEEKING

AND

PROVISION

OF PUBLIC

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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 et al. ( 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.

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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

XE.

'-1(I)

(I)

The Pareto optimal amount of each good is independent of the population size
because of the assumptionsmade 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

PROVISION

OF PUBLIC

GOODS

AND

PUBLIC

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 contributions 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) <
this
decreases
with
o, hence,
utility
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.
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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 Z1the
amount of lobbying of group j as a whole, we have p1= ZJ/Z, where Z1 =
Ei zU,and Z = YjZ1.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

'/k(
X;s= Vt- (I /k) .

XsR

(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=
The amount of lobbying is determined as a Nash
p1v(XRs) +w-XjRs/k-z0y.
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:
or

v(XRS

(Z-Z,/Z2
)

(6)

= 0

V (XjRJ) apJ/ZiI
I,

j=

I,

...,k.

(7)

4 See Katz et al. (I990),

and Ursprung (I990), for related public goods models
Nitzan (i99i),
incorporating rent seeking. These authors do not attempt to provide welfare comparisons of the kind
performed in this paper.

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Summing up the above k equations we obtain

(8)

v(Xjs) (k-i)/Z=

from which it follows that the equilibrium amount of rent seeking effortsis
Z = v[v'-'( 1k)] (k- i)/k, and the individual rent seeking effort is ZIN =
v[v'-' (i/k) ] (k- i) Ink2.(SeealsoKatz etal. ( I990) forthe derivationof Z.) This
yields the following level of an individual's welfare:

(9)
)Ink,
URS must be larger than
where XRS
v'-' ( i/k). To ensure an internal solution,
w, otherwise the jurisdictions would do better by not producing the public
goods at all. Hence,
uRS = V(XRS)/k+w

(k-

-XRS/k-v(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,
v(XRS)

duRS

v(XRS)_XRS

dk

XRSV(XRS)

v(XRs) k-2
n
k3

[v (XRS)I

f(XRS\ k-

()

dXRS

nk2J dk

where the sign follows from (i o). This, in turn, implies that URS decreasesin k,
that is, the number of competingjurisdictions is adversely related to welfare.In
any case, however, uRS < UE, that is rent seeking is indeed socially wasteful.
II.3. Privateversuspublicprovision
Recalling (4) and (9) the welfare difference between public and private
provision of public goods is given by
v(XRS)

v(XRS)/k-XRS/k

(k- i)/nk2

_ V(XCN) + XCN.

(II)

Since URS is an increasing function of n, and uCN is a decreasing function of n,

the expression in (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 uCNis 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). Substituting 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 presentedin Katz et al.

? Royal Economic Society

(I990)

and Nitzan (i99i).

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SEEKING

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I24I

Table I
Thewelfaredifferential
between
privateprovisionandpublicprovisionofpublicgoodswith
influence
activityoverwhichpublicgoodtoproduce(boldnumbersrepresent
preference
for
thepublicprovision)
*
k\n
a = O-I

as= 0-2
ao= 03

0
04

IO

Io2

- 0279

3
4
5

-o0408
-0o473
-05I5

-0-I50

0025

-0o27I

-0?340

-o-o96
-o i66

- 0075

-0-048

0-206

I03

-0-I32
-0-262
-0 329

-0o224

- 0373

-0-267

0-076

os53
0o059

I04

oo56

-0-025

-0-I55

-0?074
-0-I43
-oi86
0172

O-II9

Io5

O-II9

-OOII

-o-o80
-0-I23
0'201

-0o072

0 050
-o0020

0130

01-49

0-I56

0001

0-020

o0o28

o-o8i

o-o83

oo86

-o0002

o o8o

0010

* 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 noncooperative 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
provision more wasteful since 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 (sometimeswell 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.

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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 assume that
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 necessarilyimpair the welfare
enhancing potential of centralised intervention.
Ben GurionUniversity
Date of receiptoffinal typescript:MarchI993
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