Rent-seeking

Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth.^[1] Rent-seeking activities have negative effects on the rest of society. They result in reduced

Successful capture of regulatory agencies (if any) to gain a coercive monopoly can result in advantages for rent-seekers in a market while imposing disadvantages on their uncorrupt competitors. This is one of many possible forms of rent-seeking behavior.

Description

The term rent, in the narrow sense of

In many market-driven economies, much of the competition for rents is legal, regardless of any harm it may do to an economy.^[citation needed] However, various rent-seeking behaviors are illegal, such as the forming of cartels or the bribing of politicians.

Rent-seeking is distinguished in theory from

The Tullock paradox is the apparent paradox, described by economist Gordon Tullock, on the low costs of rent-seeking relative to the gains from rent-seeking.^[10][11]

The paradox is that rent-seekers wanting political favors can bribe politicians at a cost much lower than the value of the favor to the rent-seeker. For instance, a rent seeker who hopes to gain a billion dollars from a particular political policy may need to bribe politicians with merely ten million dollars, which is about 1% of the gain to the rent-seeker. Luigi Zingales frames it by asking, "Why is there so little money in politics?" because a naïve model of political bribery and/or campaign spending should result in beneficiaries of government subsidies being willing to spend an amount approaching the value of the profits derived from the subsidies themselves, when in fact only a small fraction of that is spent.^[12]

Possible explanations

Several possible explanations have been offered for the Tullock paradox:^[13]

1. Voters may punish politicians who take large bribes, or live lavish lifestyles. This makes it hard for politicians to demand large bribes from rent-seekers.
2. Competition between different politicians eager to offer favors to rent-seekers may bid down the cost of rent-seeking.
3. Lack of trust between the rent-seekers and the politicians, due to the inherently underhanded nature of the deal and the unavailability of both legal recourse and reputational incentives to enforce compliance, pushes down the price that politicians can demand for favors.
4. Rent-seekers can use a small part of the benefit gained to make contributions to the politicians who provided enabling legislation.

Examples

The classic example of rent-seeking, according to

The concept of rent-seeking would also apply to corruption of bureaucrats who solicit and extract "bribe" or "rent" for applying their legal but discretionary authority for awarding legitimate or illegitimate benefits to clients.[18] For example, taxpayers may bribe officials to lessen their tax burden.

Regulatory capture is a related term for the collusion between firms and the government agencies assigned to regulate them, which is seen as enabling extensive rent-seeking behavior, especially when the government agency must rely on the firms for knowledge about the market. Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition.^[19] The term monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking. Often-cited examples include a lobby that seeks economic regulations such as tariff protection, quotas, subsidies,^[20] or extension of copyright law.^[21] Anne Krueger concludes that "empirical evidence suggests that the value of rents associated with import licenses can be relatively large, and it has been shown that the welfare cost of quantitative restrictions equals that of their tariff equivalents plus the value of the rents".^[6]

Rent-seeking through government enterprise takes the form of seeking

Lotta Moberg presents an argument that export processing zones (EPZ) allow governments to choose exporting industries which receive tariffs allowing for rent seeking to take place. An example of this occurred in Latin America in the 1960s with Joaquín Balaguer's response to pressure from the United States to open the Dominican Republic's export market. At the time, the United States was a massive trading partner for sugar while providing foreign aid and military support which allowed Balaguer's regime to take hold. Joaquín Balaguer used EPZ to allow for some markets to remain tariffed while appeasing the markets facing political pressures. This created a sub-optimal environment for exporters as they were able to invest in rent seeking activities (lobbying) to gain access to EPZ to gain tax and tariff exemptions.^[23]

In some cases, rent-seeking can provide a net positive for an economy. Shannon K. Mitchell's article "The Welfare Effects of Rent-Saving and Rent-Seeking" provides such an example through a model of rent-seeking when firms need to expand to obtain their exporting rents.^[24]

Economists such as

The phenomenon of rent-seeking in connection with monopolies was first formally identified in 1967 by Gordon Tullock.^[27]

A 2013 study by the World Bank showed that the incentives for policy-makers to engage in rent-provision is conditional on the institutional incentives they face, with elected officials in stable high-income democracies the least likely to indulge in such activities vis-à-vis entrenched bureaucrats and/or their counterparts in young and quasi-democracies.^[28]

Criticism

In the 1980s, critiques of rent-seeking theory began to emerge, questioning the ambiguity of the concept of "wasted resources" and the reliability of the assumptions being made from it.^[29] Samuels argues that productivity is defined by rent-seeking theorists as a strictly physical property but ignores the rights that surround and define the product. He further asserts that rent-seeking theorists ignore a fundamental principle of being economic actors: that we live in markets of scarce resources and it's how we use these resources which drives supply and demand, and the notion of "wasted resources" rejects our preferences to allocate those resources.^[29]

Writing in The Review of Austrian Economics, Ernest C. Pasour says that there may be difficulties distinguishing between beneficial profit-seeking and detrimental rent-seeking.^[30]

In 2023, Angus Deaton wrote:

In retrospect it is not so surprising that free markets, or at least free markets with a government that permits and encourages rent seeking by the rich, should produce not equality but an extractive elite that predates on the population at large. Utopian rhetoric about freedom has led to an unjust social dystopia, not for the first time. Free markets with rent seekers are not the same as competitive markets; indeed, they are often exactly the opposite.^[3]

Possible consequences

From a theoretical standpoint, the

Rent-seeking can prove costly to economic growth; high rent-seeking activity makes more rent-seeking attractive because of the natural and growing returns that one sees as a result of rent-seeking. Thus organizations value rent-seeking over productivity. In this case, there are very high levels of rent-seeking with very low levels of output.^[citation needed] Rent-seeking may grow at the cost of economic growth because rent-seeking by the state can easily hurt innovation. Ultimately, public rent-seeking hurts the economy the most because innovation drives economic growth.^[32]

Government agents may initiate rent-seeking, as by soliciting bribes or other favors from the individuals or firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer.^[33] It has been shown that rent-seeking by bureaucracy can push up the cost of production of public goods.^[34] It has also been shown that rent-seeking by tax officials may cause loss in revenue to the public exchequer.^[18]

A study by Laband and John Sophocleus in 1988^[36] estimated that rent-seeking had decreased total income in the US by 45 percent. Both Dougan and Tullock affirm the difficulty of finding the cost of rent-seeking. Rent-seekers of government-provided benefits will in turn spend up to that amount of benefit to gain those benefits, in the absence of, for example, the collective-action constraints highlighted by Olson. Similarly, taxpayers lobby for loopholes and will spend the value of those loopholes, again, to obtain those loopholes (again absent collective-action constraints). The total of wastes from rent-seeking is then the total amount from the government-provided benefits and instances of tax avoidance (valuing benefits and avoided taxes at zero). Dougan says that the "total rent-seeking costs equal the sum of aggregate current income plus the net deficit of the public sector".^[37]

Mark Gradstein writes about rent-seeking in relation to public goods provision, and says that public goods are determined by rent seeking or lobbying activities. But the question is whether private provision with free-riding incentives or public provision with rent-seeking incentives is more inefficient in its allocation.^[38]

Political rent-seeking can also affect immigration. Welfare states incentivise unproductive migration and can create continuation of past behaviour of not accumulating personal wealth and being dependent on government transfers.^[39] Alternatively, productive migrants are incentivised to leave rent-seeking societies, possibly resulting in further economic decline.^[40]

The Nobel Memorial Prize-winning economist Joseph Stiglitz has argued that rent-seeking contributes significantly to income inequality in the United States through lobbying for government policies that let the wealthy and powerful get income, not as a reward for creating wealth, but by grabbing a larger share of the wealth that would otherwise have been produced without their effort.^[41][42] Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva have analyzed international economies and their changes in tax rates to conclude that much of income inequality is a result of rent-seeking among wealthy tax payers.^[43]

Laband and John Sophocleus suggest that the lack of empirical evidence on rent-seeking is due to the broad scope of rent-seeking and rent avoidance activities. Additionally, they suggest that many economic performance measures, such as Gross Domestic Product, include goods and services that are part of the rent-seeking process.^[44]

See also