International Journal of

Business & Management Studies

ISSN 2694-1430 (Print), ISSN 2694-1449 (Online)

DOI: 10.56734/ijbms

A Model Of Horizontal Rents

Abstract

In most countries public sector workers are paid more than their private sector peers with similar characteristics. This results in the re-distribution of income to the public sector employees as their wage premiums are paid out of taxes on private sector workers. For that reason, we call such premiums “horizontal rents,” as opposed to “top rents” earned by those at the top of income distribution. The paper discusses the concept of horizontal rents and presents the theoretical model of horizontal rents developed in the framework of the game theory approach. The main players in the model are the politician and the trade-union representative acting on behalf of public sector workers. The model evaluates linkages between various parameters and the rent premium paid to the public sector workers. The model outcomes indicate that an increase in the share of state spending in the GDP brings about an increase in horizontal rent while an increase in the share of people employed in public sector results in decrease in per person horizontal rent, all else equal. These effects capture the long-term dynamics between variables. The implication of these result is that the horizontal rent load will likely rise with the increase in the share of public-sector employment.

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