The Optimal Size of Public Sector and Endogenous Growth Under Rent-Seeking Competition(Vol.7 No.2)
Center for Fiscal Analysis, Korea Institute of Public Finance, Tel.: +82-2-2186-2334, Email: firstname.lastname@example.org
Department of Economics, Kyung Hee University, Tel.: +82-2-961-9375, Email: email@example.com
This paper incorporates competition for fiscal transfers (equivalently, rent seeking from state coffers) into a standard general equilibrium model of economic growth and endogenously chosen fiscal policy. The government generates tax revenues, but then each self-interested individual agent tries to extract, for his own personal benefit, a fraction of these revenues. Extracted tax revenues could alternatively be used to finance economy-wide infrastructure. We look at a Nash equilibrium in individual agents’ behavior, and then investigate what the society should do to discourage rent-seeking competition. The focus is on the optimal size of public sector.