Technological Progress and Rent Seeking

Abstract We model firms’ allocation of resources across surplus-creating (ie, productive) and surplus-appropriating (ie, rent-seeking) activities. Our model predicts that industry-wide technological advancements, such as recent progress in data collection and processing, induce a disproportionate and socially inefficient reallocation of resources toward surplus-appropriating activities. As technology improves, firms rely more on appropriation to obtain their profits, thereby endogenously reducing the impact of technological progress on economic progress and inflating the price of the resources used for both types of activities. Our theoretical insights shed light on the rise of high-frequency trading.