Toward a Theory of Rent Seeking and Structural Reforms

This paper constructs a dynamic model to explore the intertwined dynamics of the rent-seeking activities that are required to compensate losers in a reform and the adoption of different types of structural reforms in transitional economies. By disaggregating the reforming type into structural reform with gradualist characteristics and shock-therapy structural reform, we show that there are two kinds of optimal reforming sequence: the first case starts with structural reform with gradualist characteristics while the second starts with shock-therapy structural reform. We further demonstrate that whether a social planner starts by adopting the gradualist or shock therapy nature of structural reform is contingent upon the optimal amount of rent-seeking activities required to compensate the potential losers under these two types of structural reform at a given time. Finally, we also implement some simulation analysis to corroborate the theories proposed earlier in the paper