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Rent Seeking and Allocative Efficiency

This paper considers a rent-seeking game (specifically, a winner-takes-all contest) with incomplete information. By allowing for sequential moves, a Bayesian-Stackelberg equilibrium can be constructed. It can be shown that, at the Bayesian-Stackelberg equilibrium, it is always possible that the allocative efficiency argument fails. That is, there are cases in which the Stackelberg follower is more efficient but loses the contest. Using a specific class of distributions, it is also shown that sometimes the corrupt official will choose the Bayesian-Stackelberg equilibrium over the Bayesian-Nash equilibrium in order to maximise the expected bribe revenue. That is, when designing the rules of the rent-seeking game, the dynamic nature of competition will be taken into account.