Technological Progress and Rent Seeking

Abstract

We model firms' optimal allocation of resources between surplus-creating (a.k.a., productive) activities and surplus-appropriating (a.k.a., rent-seeking) activities. We show that economy- or industry-wide technological progresses, such as the recent improvements in processing big data, induce a disproportionate and socially inefficient allocation of resources towards rent seeking. As technology improves, firms lean more on rent seeking to generate their profits, endogenously reducing the impact of technological progress on economic progress and inflating the price of resources that can either be used for rent seeking or production.