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The rent giver's revenge: Enforcement rents in the international economy
Abstract
In an international economy lacking any overarching institution with the ability to enforce contracts costlessly, how can a firm obtain an agreement governing the future behavior of a firm or government in another country that may not later be broken? This dissertation applies a view of economic rents stemming from the literature on transaction costs and principal-agent problems, to examine the role they can play as an international enforcement mechanism. The dissertation models two different cases of a firm persuading its government to grant rents to a foreign firm, contingent on the foreign firm behaving in specified ways. The first model illustrates the use of enforcement rents to strengthen free trade forces in another country. In the model a firm in a small country is unsure whether to specialize in production for export to a large country, since the production will require transaction-specific investment and the government of the foreign country might impose an optimal quota at any point in the future. I demonstrate that the government of the small country can intervene indirectly in the policymaking process of the foreign government by giving a rent to a politically influential firm or industry in the foreign country, with the understanding that this rent will be taken away if the firm does not lobby its government against protection. I prove not only that such an interventionary policy enhances trade but that it may be Pareto-superior to the outcome without enforcement rents. In the second model firms in two different countries face a Prisoner's Dilemma arising from positive international externalities to R&D. Again, the government in one of the two countries grants a rent contingent on the foreign firm's cooperation, enabling the two firms to reach a Pareto-optimal level of R&D expenditure. The literature review contrasts the productive role of rents modelled in this dissertation, with the view of rents prevailing in the literature on rent seeking. It argues that the latter view of rents, and the associated distinction between purely economic forces and political intrusion into markets does not allow for transaction costs, moral hazard, and other contracting problems.
Subject Area
Economics|Economic theory
Recommended Citation
Honderich, Kiaran, "The rent giver's revenge: Enforcement rents in the international economy" (1991). Doctoral Dissertations Available from Proquest. AAI9207411.
https://scholarworks.umass.edu/dissertations/AAI9207411