Classroom game on the theory of rent seeking: some practical experience.

• Author: Bischoff, Ivo
• Position: Targeting Teaching

1. Introduction

   Teaching tools are valuable in teaching the often-abstract theoretical models of economics (e.g., Holt 1999). The theory of rent seeking is one of these abstract theoretical concepts; however, thanks to the classroom game proposed by Goeree and Holt (1999), the basic logic behind this theory can be illustrated in a very vivid way. The game's effectiveness is primarily due to the fact that the rules are very easy to understand and incorporate the major characteristics of the theoretical models of rent seeking (Tullock 1980, 1993; Nitzan 1994). Hence, it is possible for students to see the connections between the game and the theoretical background and thus gain an intuitive understanding of the phenomenon of rent seeking. In addition, the students enjoy the experiments very much because they offer a pleasant change from the usual class routine.

   We have played the game in a number of different classes at Justus-Liebig-University Giessen in Germany and Kasan State University in Russia. On the basis of the experience we have gained in these classes, we suggest two modifications to the setup of the game in section 3 of this paper. These modifications are intended to improve the already-high teaching value of the game. Furthermore, section 3 introduces an extension to the rules that can shed some light on the decision-making process of the students during the game. Before the changes in the setup and their effects on the outcome of the game are discussed, section 2 outlines the rules of the game as proposed by Goeree and Holt (1999) and briefly describes their experience in applying it.

2. The Original Classroom Game as Proposed by Goeree and Holt

   In the classroom game proposed by Goeree and Holt (1999), four teams of students apply for a number of telephone licenses. The game consists of two parts. The first part consists of a number of rounds. In every round, one license, worth $16,000, is at stake. Every team can complete up to 13 applications for the license per round. Each application results in costs of $3000 in the first round and $1000 in the later rounds. The license is allocated in a simple lottery. The team that wins the license increases its capital stock by the value of the license minus its application costs. All other teams suffer losses in the amount of their application costs. This setup resembles the starting point of the game-theoretic analyses of rent seeking put forth by Tullock (1980). Following Tullock (1980), the Nash equilibrium in this classroom game involves every player handing in (N - 1)V/([CN.sup.2]) applications, where V denotes the value of the licence, C denotes the costs per application, and N is the number of teams. T hus, the players are expected to fill in one application in the first round, in which C = $3000, and three applications in the later rounds, in which the teams incur costs of only $1000 per application. The Nash-equilibrial rent-seeking costs per round amount to $12,000 for a license worth $16,000. Starting with an initial capital stock of $100,000, every team is expected to maximize its capital stock by the end of the game. By keeping a record of the development of their capital stock, the students can see that rent seeking results in massive social costs. To show that these social costs can...