Rent seeking activities and aggregate economic performance: The case of Greece

In this paper we build a dynamic general equilibrium model in order to examine the interrelated role of rent seeking activities, institutions and fiscal policy on Greece’s economic performance over the last 40 years. To do so we apply the, growth accounting based, Kehoe and Prescott (2002, 2007) Great Depression methodology. We focus on the 1979-2001 period during which Greece experienced a large, rapid and sustained deviation of real per capita GDP from its respective trend. According to the methodology we use, this period can be characterized as a great depression episode. The model is the standard neoclassical growth model, augmented with a government sector and an institutional structure which creates incentives for optimizing agents to engage in rent seeking activities. The government levies distortionary taxes and uses the revenues to finance public consumption, public investment, lump-sum transfers and fiscal privileges to rent seekers (privileged transfers, subsidies and tax treatments). Rent seeking behaviour creates a cost to the economy in the form of an unproductive use of resources. The model is calibrated to the Greek economy. Our growth accounting exercise shows: First, in terms of the path of key macroeconomic variables, our model fits the data quite well. Second, a non negligible proportion of the observed decline in total factor productivity can be accounted by rent seeking activities. Moreover, the model also produces an index measuring the quality of institutions in the Greek economy. This model based index closely resembles the one widely used in the literature as a proxy of a country's quality of institutions, the Internal Country Risk Guide (ICRG) index.