The Worst Ever Auction

Dinosaur comics provides a lesson in public choice theory:

comic2-1585

Crampton ran a dollar (in fact a 20-dollar auction, if memory serves) auction when I took his Public Choice class (Best. Class. Ever.) a couple of years ago to demonstrate the welfare losses of rent-seeking. I’m happy to report that I played the only winning move and decided not to play (and I don’t think that movie could ever be referenced enough).

Gordon Tullock showed [gated] that firms competing for government favours are in a similar position to bidders in a dollar auction: the effort they’ve put into winning that government contract or having regulation harm their competitors immediately becomes a sunk cost and therefore irrelevant to future decisions. They are then faced with the option of committing further resources to rent-seeking, or packing up and going home. In some cases, they may even commit more resources to rent-seeking than the total value of the rent itself. Everyone loses, since even the looters pay $2 for the stolen $1 bill.

The person running the auction is in a position to make a tidy profit. Rent-seeking, though, is not normally a pure transfer, but hugely wasteful expenditure on dodgy research and obscured bribes. Some politicians surely get some nice perks, but the benefit they receive will rarely match the cost.

This is one among many reasons that government is shit.

3 Responses

  1. Stop telling people not to bid in my auctions. It makes me poorer. Then again, the set of incoming students who read your blog and who would otherwise not have figured out the winning move is empty, so no worries.

    Of course, the bigger Tullock puzzle is why there is so little rent-seeking. Most studies tend to find underdissipation. Best answer thus far is that the dollar isn’t really worth a dollar ’cause the winner has to make costly investments post-winning to actually win it (inefficiency of opaque transfers).

  2. […] on November 12, 2009 by Brad Taylor Here’s a video of a public choice teacher running an all-pay dollar auction, and describing its relevance to lobbying (hat tip: Max […]

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