Auctioning Rents

47 Pages Posted: 13 Mar 2017

Date Written: March 10, 2017

Abstract

Rent-seeking—the practice of seeking private gain at disproportionate public cost—is a harmful activity that every political system must strive to minimize. But efforts by capitalist democracies to prevent rent-seeking often also harm the robust public debate that is essential to democratic self-government.

An elegant method for reducing socially wasteful rent-seeking in certain areas would be to use auctions to allocate certain entitlements that are currently allocated by vote in the political system. Auction participants would simply pay the government for the entitlement, rather than spend money seeking votes in the political process. As this Article explains, auctions represent a “fourth box” of social choice: They are centralized, like politics ordinarily are, but allocate using money, like the market does. They have the capacity, therefore, to capture rents that would ordinarily be dissipated in rent-seeking contests and to facilitate transfers that increase net social welfare. In short, auctions are an overlooked but sometimes effective mechanism for allocating certain kinds of entitlements. This Article explains how the introduction of auctions into areas that are heavily lobbied—it uses as illustrative examples the allocation of intellectual property rights and pollution rights—could reduce the social costs of rent-seeking and enhance net social welfare. It develops a stylized model that helps to show how auctions could achieve those results. It suggests one possible approach—a federal agency—that could be used to administer entitlement auctions. Finally, it grapples with the problems that auctions could introduce into our political system. Most significantly, auctions are likely to prove unworkable where certain assumptions do not hold—such as where interested parties have limited access to capital, where welfare-reducing transfers are still favored by a political majority, and where auction participation is not cost-effective for some participants. Additionally, to those who see voting, and the political equality it assumes, as fundamental to the character of our institutions or to the legitimacy of certain social choices, auctions are an unacceptable substitute for voting.

Nonetheless, with respect to certain allocative decisions, auctions could enhance net social welfare and reduce the waste from rent seeking contests. Where that is the case, there is a good argument that auctions should be more frequently considered as a mechanism for social choice.

Keywords: rent seeking, public choice, social choice, law of democracy, economics, auctions, voting theory, voting, campaign finance, lobbying

JEL Classification: D47, D61, D71, C72, D82, H41, P16

Suggested Citation

Tutt, Andrew, Auctioning Rents (March 10, 2017). Available at SSRN: https://ssrn.com/abstract=2931023 or http://dx.doi.org/10.2139/ssrn.2931023

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