The distributional consequences of rent-seeking

We analyze the distributional effects of rent-seeking via the financial sector in a model calibrated to US data. Rent-seeking implies a misallocation of resources that increases wealth inequality among non-rent-seekers and for the whole economy. A deterioration in institutional quality implying more rent-seeking leads to welfare losses for non-rent-seekers, especially for those with higher earnings and initial wealth, because they are most affected by the deterioration of the aggregate economy. On the other hand, welfare gains are larger for rent seekers with higher earnings and wealth, who have an increased resource extraction capacity.