X-efficiency, rent-seeking and social costs: Reply

Conclusion

Contrary to their claim, Naughton and Frantz fail to disprove the fundamental difference in the social costs of rent-seeking and X-inefficiency identified in our paper. Nor have they shown that our measure of the social costs is incorrect. What they have done is introduce, in an ex post fashion, fixed costs for X-inefficiency. But they fail to provide any explanation of why the inefficiency should take the fixed cost form or why there should be unrecoverable sunk costs. Quite aside from the issue of dissipation, Naughton and Frantz also argue that the level of rent-seeking cost is inherently vague, a contention with which we disagree.

Naughton and Frantz's Comment does not argue convincingly against our conclusions and certainly does not demonstrate their claims. In fact, Naughton and Frantz conclude by accepting one of the major results in our article. At the end of their Section 4, they conclude that “part of what passes for X-inefficiency is a transfer.” So long as this is true, then, for a given cost shift, the social costs of X-inefficiency can never exceed the social costs of rent-seeking.