Bureaucracy and labor market inefficiency: A contest model

The theory of bureaucracy describes the internal rent-seeking incentives in government agencies. A consequence is that a government agency competing with other agencies for budgetary funding will value rent-seeking ability rather than individual productiveness when choosing who to hire. With private-sector firms valuing personal productiveness, I look at labor-market incentives when job seekers facing employment options can choose effort at becoming productive and effort at becoming better rent seekers. A nested lottery contest with the two types of effort is used to show that, under reasonable conditions, prospective employees invest in the latter type of effort more than in the former. The productiveness of labor is therefore diminished in the private sector when a government agency is hiring in the same labor market.