Wealth constraints, lobbying and the efficiency of public allocation

In Esteban and Ray (1999, Inequality public allocation and development, Mimeo.) we formalize a model in which individuals lobby before the government in order to benefit from some productivity-enhancing government action (infrastructures, direct subsidies, permissions, in short). The government honestly tries to allocate these permissions to the agents that will make the best use of them, as revealed by the intensity of their lobbying. If the marginal cost of resources varies with wealth, the amount of information transmitted through lobbying will depend on the degree ofinequality. In this paper, we summarize the main approach and examine the special case of equal wealth. We show that the nature of signaling equilibria is critically affected by per-capita wealth. (C) 2000 Elsevier Science B.V. All rights reserved.