THE WELFARE EFFECTS OF RENT-SAVING AND RENT-SEEKING

This paper uses an overlapping-generations framework to model the allocation of import licences of intermediate goods according to firm capacity. It shows that this method of allocation encourages rent-seeking and also thereby improves welfare compared with a method that does not allow rent-seeking. Krueger (1975, 1974b) and Bhagwati and Desai (1970) describe how Turkey and India have allocated imports on the basis of firm capacity, which led to rent-seeking through overexpansion of capacity. Bhagwati and Srinivasan (1980) first recognized the possibility that rent-seeking may actually improve welfare in the presence of a distortion, as it does in this paper.