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This paper describes how wealth inequality may distort public resource allocation. A government seeks to allocate limited resources to productive sectors, but sectoral productivity is privately known by agents with vested interests in those sectors. They lobby the government for preferential treatment. The government—even if it honestly seeks to maximize economic efficiency—may be confounded by the possibility that both high wealth and true economic desirability create loud lobbies. Broadly speaking, both poorer economies and unequal economies display greater public misallocation. The paper warns against the conventional wisdom that this is so because such governments are more "corrupt."

This paper describes how wealth inequality may distort public resource allocation. A government seeks to allocate limited resources to productive sectors, but sectoral productivity is privately known by agents with vested interests in those sectors. They lobby the government for preferential treatment. The government - even if it honestly seeks to maximize economic efficiency - may be confounded by the possibility that both high wealth and true economic desirability create loud lobbies. Broadly speaking, both poorer economies and unequal economies display greater public misallocation. The paper warns against the conventional wisdom that this is so because such governments are more >corrupt.>. ; This research was supported by National Science Foundation Grant 0241070 (Ray), MCYT Research Grant SEC-2003-1961 (Esteban), and the Polarization and Conflict Project CIT-2-CT-2004-506084 funded by the European Commission–DG Research Sixth Framework Programme. ; Peer Reviewed

In an examination of the effects of distortions in agricultural incentives, based on secondary analysis of World Bank & other international statistical data, it is concluded that lowering agricultural protection in industrial & European countries, while reducing industrial protection in developing countries, would contribute to economic welfare overall by improving resource allocation in world agriculture as well as in world industry. These conclusions point to the desirability of multilateral trade negotiations that would permit simultaneous changes in policies. 4 Tables, 13 References. Modified HA