Market failures within poor institutions: the effects of bureaucrats rent-seeking activity

This paper presents a model which describes the interaction between the strength of institutional environment and the optimal allocation of resources in a context where the State intervenes to correct market failure. The strength of the institutional environment is captured using a parameter that accounts for the rent-seeking activity of self-interested bureaucrats and the administrative capability of government. The model demonstrates that in a weak institutional environment, through adequate State policies, bureaucrats’ legal rent-seeking represents a mechanism which can be used to stimulate the adoption of good production technology, to increase social surplus, and to neutralize market failure with less distortions.