The Reformer’s Dilemma

  • William F. ShughartII


By redirecting scarce resources away from socially productive employment, the pursuit ofwealth transfers by special interest groups converts those transfers into social costs. In the limit, the available rents are fully dissipated and the welfare loss associated with rent seeking equals the sum of the value of the rent rectangle and the deadweight loss triangle. This article shows that by eliciting expenditures to defend existing rents, attempts to reform the rent-seeking society cannot lower the social cost bill; they can only add to it. Hence, the only way to avoid the reformer’s dilemma is to not grant monopoly rights in the first place.


Social Cost Welfare Loss Welfare Cost Rent Seek Deadweight Loss 
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  1. 1.
    For a recent review of the literature on rent seeking, see Tollison (1997).Google Scholar
  2. 2.
    The exact (ex ante) dissipation result is robust under the assumption that the number of bidders is endogenous. See Corcoran (1984) and Higgins, Shughart, and Tollison (1985).Google Scholar
  3. 3.
    Bribery, which involves a simple cash transfer to the grantor of the monopoly right, consequently does not rise to the level of social cost.Google Scholar
  4. 4.
    For a discussion of the distinctions between rent seeking and profit seeking, see Buchanan (1980). Although animated by the same incentives, the key point is that output is fixed in the former case but not in the latter.Google Scholar
  5. 5.
    The reform process is itself costly; it is not modeled here. Any real resources devoted to reform must be added to the welfare costs of rent seeking.Google Scholar
  6. 6.
    Because the private gains from rent seeking increase as the number of bidders increases, a forward-looking extortionist has incentives to encourage entry into lobbying for monopoly rights.Google Scholar
  7. 7.
    A “utilitarian reformer’ would devote resources to the reform effort up to the point where the anticipated social gains (the Harberger triangle plus the present value of any undissipated monopoly rents) are just equal to the anticipated social costs of deregulation or privatization, which costs include expenditures by the incumbent monopolist to defend his rents against expropriation and the costs of the reformer’s own efforts. The incumbent may find it worthwhile to spend enough to make deregulation socially unprofitable in this case. On the other hand, a ”factionalist reformer’ who cares about wealth transfers but not about social costs and benefits may outspend the incumbent monopolist, rendering the social value of reform negative. The social costs of rent seeking will obviously be considerably higher in the latter case. See Tollison and Wagner (1991).Google Scholar
  8. 8.
    The compensation currently being paid for the “stranded costs” of regulated electric utilities suggests a political unwillingness to impose such capital losses (McChesney 1999).Google Scholar

Copyright information

© Springer Science+Business Media New York 2001

Authors and Affiliations

  • William F. ShughartII
    • 1
  1. 1.University of MississippiUSA

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