November 2021

IZA DP No. 14871: Internal versus External Rent-Seeking with In-Group Inequality and Public Good Provision

Dripto Bakshi, Indraneel Dasgupta

We examine how inequality in the endowment of secure wealth, mediated through voluntary public good provision, affects rent-seeking within and between groups. We model a scenario where two communities, each internally differentiated into rich, intermediate and poor segments, contest one another for the division of some rent. Any rent accruing to a community is distributed internally according to another, simultaneous, contest. Individuals first decide how much of their endowments to allocate to the two contests. They subsequently decide how to allocate their remaining wealth and rental income between private consumption and a community-specific public good. We find that greater endowment inequality among the non-rich, both within and across communities, aggravates inter-group rent-seeking. Within-group rent-seeking may rise as well. In contrast, higher such inequality between the rich and others within a community depresses between-group conflict. Within-group conflict may fall as well. The ‘paradox of power’ is violated for both kinds of conflict – better-endowed individuals are more successful in the internal conflict, while better-endowed groups are more successful in the external conflict.