Rent Dissipation in Share Contests

This article investigates rent dissipation—the total costs of rent seeking in relation to the value of the contested rent—in share contests. We consider preferences that are more general than usually assumed in the literature, which allow for contestants to have diminishing marginal utility. With sufficiently concave preferences the equilibrium will feature over-dissipation if the rent is small, and under-dissipation if the rent is large: if contestants have strong diminishing marginal utility and they are contesting a small rent they are highly sensitive to changes in their allocation of the rent so are relatively effortful in
contesting it; by contrast when the rent is large they are less effortful relative to the size of the rent. Thus, the inclusion of diminishing marginal utility allows us to reconcile the Tullock paradox—where rent-seeking levels are observed to be relatively small compared to the contested rent—with observed over-dissipation of rents in, for example, experimental settings. We also propose a more general rent dissipation measure that applies to any contest and is suitable for general preferences.