Risk aversion and rent-seeking: An extension and some experimental evidence

Summary and concluding remarks

Theoretical investigations indicate that the risk attitudes of individuals will effect the amount of rent that can be assumed to be dissipated by rent-seeking activities. Following this line of investigation we extend Hillman and Katz's work to a small numbers case and demonstrate that the degree to which a monopoly rent is dissipated is dependent upon the structure of the risk attitudes of two risk averse individuals.

Our earlier laboratory results were evaluated with respect to the risk neutral Cournot-Nash predictions. However, given the uncertainty present in the rent-seeking experiment, our ability to reject these risk neutral predictions may not be, in fact, a failure for the model but a result of risk aversion. In laboratory experiments in which we control for the relative risk attitudes of individual agents, we show that risk aversion matters. The relative risk aversion of individuals affects the level of rent-seeking activity and the extent to which rents are dissipated. In our experiments, the relatively less risk averse individuals dissipated relatively more rent.

In future work, it would be instructive to conduct a set of laboratory experiments in which a reliable control for risk neutrality is introduced. This would allow for a more precise test of the risk neutral Cournot-Nash predictions.