Rent-seeking in an emerging market: A DSGE approach

• Published in: Economic systems 2021-06, Vol.45 (2), p.100775, Article 100775
• Main Authors: Costa Junior, Celso J., Garcia-Cintado, Alejandro C.
• Format: Article
• Language: English
• Subjects: DSGE model; Privilege; Public spending; Rent extraction; Rent-seeking; Taxation
• ISSN: 0939-3625; 1878-5433
• DOI: 10.1016/j.ecosys.2020.100775

•We provide a time series of rent-seeking for an emerging economy such as Brazil.•This series shows a positive correlation with the 2000’s “Commodity Super Cycle”.•It falls as a result of some political scandals and their ensuing investigations.•Rent-seeking behavior shows a pattern of procyclicality in the Brazilian economy.•Weak institutions play a crucial role in driving this variable procyclically. Due to the fact that rent-seeking is by definition an unobservable variable, measuring its size and evolution over the business cycle can be a daunting challenge. In this article, by embedding rent-seeking behavior in an otherwise standard open-economy DSGE model, we are able to derive a quarterly time series of this variable (expressed as a percentage deviation from the trend) for an emerging economy such as Brazil. The estimated series, spanning the period 2002Q1−2017Q4, shows a strong positive correlation with the “Commodity Super Cycle” of the 2000 decade and falls as a result of some political scandals and their ensuing investigations, among other driving forces. We also rely on the same model to assess how several shocks hitting the economy affect both rent-seeking and the relevant macroeconomic variables in our model. Barring monetary expansions, increased exports and higher income transfers to households, expansionary shocks are associated with lower rent-seeking activity. Factoring in these two sets of results, the upshot is that rent-seeking behavior shows a pattern of procyclicality in the Brazilian economy.