Faculty of Economics and Business (FEB)
Amsterdam School of Economics Research Institute (ASE-RI)
Trade opportunities are generally seen as valuable instruments to improve the allocation of resources in society. However, when the traded rights are secured through unproductive rent-seeking contests, tradeability may exacerbate the incentives to invest in rent-seeking activities, with a resulting increase in rent-dissipation losses. The increase in rent dissipation corrodes and potentially offsets the benefits of trade, at times rendering tradeability socially undesirable. We consider a two-stage game in which the contestants have different valuations of the sought-after rent. In the first stage, parties invest to secure rights by participating in a rent-seeking contest. In the second stage, parties decide whether to reallocate the rights by entering in a Coasean exchange. We show that an opportunity for an ex post reallocation of the rights may have perverse ex ante effects. We consider the effect that such trading opportunities have on the parties' payoffs and evaluate the final outcome in terms of dissipation and misallocation costs, comparing our scenario with tradeable rents to the conventional case of non-tradeable rents.