Rent‐Seeking, R&D, and Productivity

To investigate whether rent‐seeking discourages productivity, we consider a third‐market model, in which a domestic firm and a foreign firm engage in both Research and Development (R&D) and output competition. We show that the relationship between rent‐seeking and productivity depends on two forces. On the one hand, rent‐seeking increases the marginal benefit of R&D and encourages productivity. On the other hand, a lower production cost due to R&D enables the government to extract the rent from the firm to a greater extent and discourages the productivity. Which force is dominant depends on the level of corruption or, as an alternative interpretation, the weight the government attaches to political contributions. Unlike the monotonic relationship proposed by the literature, we find a non‐monotonic relationship between rent‐seeking and productivity.