Rent seeking into the income distribution

The 50 U.S. states differ considerably in the extent to which political processes are swayed by special-interest groups. Pressure groups regularly wield overwhelming influence on policymaking in nine states (Alabama, Alaska, Florida, Louisiana, Mississippi, New Mexico, South Carolina, Tennessee, and West Virginia): they play lesser policymaking roles elsewhere, ranging from complementing other political actors to being completely subordinate to them. This paper exploits an independently constructed, five-category taxonomy of interest-group influence to explore the cross-sectional impact of rent-seeking on the distribution of income. The empirical estimates produce a consistent rank-ordering of the states in which income inequality is an increasing function of interest-group power. In particular, holding educational attainment, median income, state government expenditures relative to gross state product, population density, race and other factors constant, we find that income inequality is significantly greater (the Gini coefficient is more than one standard deviation higher) in the nine states where interest groups dominate the political process. Interest groups have smaller, but still marginally significant impacts on the income distribution in another 17 states where they are classified as dominant/complementary. We also find that greater levels of educational attainment tend to increase income inequality, as do exports. On the other hand, jurisdictions with higher median incomes, those with larger public sectors and more racially homogeneous populations exhibit greater income equality. Given that, other things being the same, incomes tend to be distributed more equally in states where government spending is higher, we conclude that it is mainly through off-budget channels that special interest groups operate to promote income inequality. But in any case, greater income inequality is yet another item to be added to the list of the social welfare costs of rent-seeking.