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Abstract

The paper develops a formal model of government's economic decisions as influenced by private agents within the context of neoclassical political economy. The government is assumed to form preferences over interest groups in the economy; in turn these preferences are influenced by the rent seeking behavior of these groups. An open, two-household, two-sector general equilibrium model is constructed to depict an environment in which preference-maximizing (rational) individuals allocate otherwise productive labor to directly unproductive rent seeking activities in order to exert political pressure on the government's choice of policy instruments. With the aid of five comparative-static experiments, the game-theoretic component and the second-best nature of the rent seeking environment is discussed. Insights are also provided on the influence of technological change, and changes in lobbying efficiency on resources allocated to rent seeking by interest groups. Key words: Rent Seeking, Political Economy, General Equilibrium.

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