of unnecessary and wasteful luxury for top government officials, but in most west-
ern democracies this type of rent is probably of minor quantitative importance
relative to total income. Instead it appears that rents are typically created with
the purpose of obtaining political support from the recipients. Thus, whereas the
Leviathan literature assumes that rent creation always reduces the policy maker’s
political backing, it seems more realistic to assume that rents are generated be-
cause they increase the likelihood that those responsible for creating them will
remain in government office.2 Third, a variable such as the fraction of public rev-
enue that is wasted - which plays a crucial role in the Leviathan literature - is not
very operational from an empirical perspective. The concept of government waste
is very subjective; what seems waste to one person may be a useful government
activity in the eyes of another person. To be able to subject political economy
models of tax competition to empirical testing, it seems desirable to develop meas-
ures of ‘political distortions’ that are more objective and hence easier to identify
empirically.3
In this paper we present a political economy framework allowing an analysis
of the effects of tax competition and tax coordination on rent seeking and social
welfare in a setting where rents are created as part of a political strategy to
maximise the probability of winning the election. Instead of considering rents
as pure waste, we thus treat them as a means of redistributing income in favour
of politically influential groups. Our model allows for a political distortion in
favour of public sector workers, say, due to the existence of strong public sector
trade unions. As an empirical matter, we do not actually postulate that public
sector employees always have a disproportionate influence on the political process,
2 Ansolabehere and Snyder (2006) provide evidence from the United States that governing
political parties at the state level do in fact skew the distribution of public funds in favour of
areas that provide them with the strongest electoral support.
3In an interesting recent paper Angelopoulos et al. (2006) incorporate rent-seeking into an
otherwise standard Dynamic Stochastic General Equilibrium model of the European econom-
ies. The calibrated version of this model allows an estimate of the fraction of time spent on
unproductive rent-seeking activities aimed at diverting public revenues into private hands. In
the model of Angelopoulos et al. this fraction turns out to be large. However, as the authors
recognize themselves, the ability of a standard DSGE model to generate realistic employment
fluctuations (with a plausible labour supply elasticity) is improved whenever one introduces a
third use of time in addition to leisure and market work. In the authors’ model rent-seeking
represents such a third use of time, but a similar improvement in the model’s ability to fit the
data might have been achieved by introducing another alternative use of time such as home
production (see, e.g., Greenwood et al. (1995)).