Rent-seeking activities, misallocation, and innovation in Argentina

Abstract

What is the efficiency cost of rent-seeking activities in Argentina? In this paper, I quantitatively show that rent-seeking activities in the form of bribes have aggregate effects through two channels. First, they generate misallocation of resources across firms, because they prevent resources from flowing to the most productive ones, reallocating them instead to those that succeed at rent-seeking. Second, such activities affect the allocation of resources within firms, because they drive resources away from innovation activities. These two channels can help explain why Argentina has both more misallocation across firms and less investment in research and development than developed economies explaining a sizable portion of the Argentinian low productivity.