Who Seeks Quasi-Rents at the Shutdown Point?

19 Pages Posted: 13 Jul 2016

Date Written: July 12, 2016

Abstract

It is rational for a profit-maximizing firm, Firm A, to discontinue production when the price of its output falls below the shutdown point. Firm A’s suppliers might, however, still lobby the government to rescue the firm, in what I call quasi-rent-seeking behavior. This is because part of Firm A’s variable cost is quasi-rent income from the perspective of its suppliers of services of specific production factors. The quasi-rents would disappear if Firm A went out of business, and they would not be fully replaced because the net returns to the specific production factors are low in their alternative uses. The suppliers of Firm A might thus have the incentive to use the political process to preserve the quasi-rents even though the owners of Firm A are indifferent to such attempts.

Keywords: discontinuity, factor specificity, quasi-rent, rent seeking, variable cost

JEL Classification: D21, D72, H81

Suggested Citation

Bilo, Simon, Who Seeks Quasi-Rents at the Shutdown Point? (July 12, 2016). Available at SSRN: https://ssrn.com/abstract=2808797 or http://dx.doi.org/10.2139/ssrn.2808797

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