Davide Infante and Janna Smirnova
Market failures within poor institutions: the effects of bureaucrats rent-seeking activity

Abstract: This paper develops a model which describes the interaction between the strength of institutional environment and the optimal allocation of resources in a context where the State intervenes to correct for market failure. The changes in the strength of the institutional environment is treated using a parameter that accounts for the rent-seeking activity of bureaucrats and the administrative capability of government. The model demonstrates that in a weak institutional environment, bureaucrats’ rent-seeking activity may represent, through adequate State policies, a mechanism which can be used to stimulate the adoption of good production technology, increasing social surplus and to neutralize market failure with less distortions.

JEL: H3, H11, P3.
Keywords: Institutional environment; market failures; rent-seeking.



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