Essays on political economy and non-market competition

Since Adam Smith it has been commonly argued that economic agents acting in their own interest can achieve desirable social outcomes as long as collusion is not prevalent. But economic agents looking for an advantage over their competitors need not constrain themselves to compete in economic markets. Rational agents will also react to non-market incentives. As evidenced by recent scandals, influence over government regulation and policy making can provide firms with an economic advantage over their competitors. Political influence is just one of many examples of how economic agents can remain competitive. This type of activity can have important effects on important economic outcomes. This volume studies the way that nontraditional competition affects economic growth, political and economic integration and distribution.; In the first essay, we construct a model where firms compete in both political and economic markets. In the political market, firms compete for influence over government transfer policy (rents). This activity can be beneficial for the firm, but is purely wasteful from the point of view of society because scarce resources are utilized to achieve a redistribution of income. In the economic market, firms compete for market share through cost reducing technological innovation. Market structure plays an important role in this economy because competition drives firms to invest in more innovation resulting in higher growth. Rent seeking affects economic growth in two important ways. It allows firms to avoid economic competition and ignore innovation and it affects the number of firms that are supported in equilibrium. The former has a negative effect on growth while the latter effect is ambiguous, depending on whether rent seeking induces entry or exit. We highlight how characteristics of the economic and political markets interact in the determination of an economy's growth and welfare.; The second essay studies the effects of economic and political integration on economic growth and welfare in light of the fact that firms interact in both economic and political markets. Growth is driven by firms' cost-reducing innovation activity and economic and political integration affect firms' incentive to innovate differently. In this setting, economic and political integration can be seen as complementary. Economic integration, when not, accompanied by political integration, can lead to less innovation and slower growth as firms respond to increased competition in the economic market by focusing more on rent seeking activity. When economic integration is accompanied by political integration, innovation and growth will always increase.; The third essay considers the distribution of benefits from economic integration, focusing on the experience of European Union enlargement. The enlargement decision is modeled as a two level political game: at home, national governments interact strategically with organized interest groups, while in the European arena interstate distributional conflicts are solved by bargaining. If there is a surplus from political integration, all countries receive a positive benefit from enlargement. However, contrary to conventional wisdom, being the outcome of a bargaining process shaped by relative power, our results suggest that EU members could gain more from enlargement than entering countries.; The focus of the fourth essay is an entirely different avenue for economic agents to compete outside of economic markets. The informal economy offers firms and consumers a parallel market. In developed nations the main cause of informal activity is tax evasion. In both the developed and developing world, informal activity tends to be more important for lower income agents. These facts can have important repercussions for tax policy. We develop a general equilibrium model to evaluate the effects of tax mix changes in light of the existence of an informal sector. We find that direct taxation is preferable to indi...