10 - Contests in Classical Problems: Divisionalization, Monopoly Welfare Losses, Coase Theorem, Voting

Summary

In Chapter 10, contest models are utilized to illuminate crucial elements of traditional economic problems. These include competition for surplus within divisionalized firms, where inefficient divisions often dominate efficient ones; the significant expenses required to attain a monopoly position, including potentially bribing public officials for the allocation of monopoly rights; and the expenses incurred in obtaining property rights that, once secured (sometimes by violent and costly means), will be efficiently exchanged in the marketplace. In the last two cases, these expenses are so substantial that they might leave no social surplus. Additionally, the cost of political campaigns, in which factions compete for the vote to control a portion or entirety of the public sector through convincing voters of the correct choice, is also examined. Overall, it is shown that contests introduce a substantial and previously unnoticed welfare cost to the traditional issues studied, thereby complementing the existing literature on the subject.