Rent seeking and economic growth: A theoretical model and some empirical evidence

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Abstract

This paper introduces distributional activities in one of the simplest endogenous growth models. Firms engage in investment and lobbying, with the extent of the latter determining the number of restrictive regulations in force. As a result, the growth rate increases with the private cost of passing a regulation, while dynamics include rise and decline, as in Olson's theory. The empirical evidence is from Uruguay, a relatively wealthy country that has dramatically lagged behind. It shows that restrictive regulations have a positive impact on sectoral output, but a negative impact at the aggregate level, which is consistent with the model.

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Fernando Correa and Carlos Grau provided excellent research assistance. Comments by Martin Paldam, an anonymous referee and participants at seminars at the NBER, Cambridge, MA, and DELTA, Paris, are gratefully acknowledged.

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