In economics, rent seeking occurs when an individual, organization, or firm seeks to
make money by manipulating the economic and/or legal environment rather than by making a profit through trade and production of
wealth. The term comes from the notion of economic rent, but in modern use of the term,
rent seeking is more often associated with government regulation and misuse of governmental authority than with land rents.
Description of concept
Rent seeking generally implies the extraction of uncompensated value from others without making any contribution to
productivity, such as by gaining control of land
and other pre-existing natural resources, or by imposing burdensome regulations or other government decisions that may affect consumers or businesses. While there may be few people in modern
industrialized countries who do not gain something, directly or indirectly, through some form or another of rent seeking, rent
seeking in the aggregate may impose substantial losses on society.
Most studies of rent seeking focus on efforts to capture special monopoly privileges, such as government regulation of free
enterprise competition, though the term itself is derived from the far
older and more established practise of appropriating a portion of production by gaining ownership or control of land. The term
"monopoly privilege rent seeking" is an often-used label for the former type of rent seeking. Often-cited examples include a farm
lobby that seeks tariff protection or an entertainment lobby that seeks expansion of the scope of
copyright. Other rent seeking is held to be associated with efforts to cause a
redistribution of wealth by, for example, shifting the government tax burden or government spending allocation. An example is an
organization that seeks different tax liabilities for married couples than for cohabiting siblings with the same incomes and
spending and investment decisions.
Development of theory
The phenomenon of rent seeking was first identified in connection with monopolies by Gordon
Tullock, in a 1967 paper.[1] The phrase rent
seeking itself, however, was coined in 1974 by Anne Krueger in another influential
paper.[2] The word "rent" in this sense is not directly
equivalent to its usual use meaning a payment on a lease, but rather stems from Adam Smith's
division of incomes into profit, wage, and rent.[3] Rent-seeking behavior is
distinguished in theory from profit-seeking behavior, in which entities seek to extract value by engaging in mutually
beneficial transactions.[4] Critics of the concept point
out that in practice, there may be difficulties distinguishing between beneficial profit seeking and detrimental rent
seeking[5]. Often a further distinction is drawn between
rents obtained legally through political power and the proceeds of private common-law
crimes such as fraud, embezzlement and theft. This viewpoint sees "profit" as obtained
consensually, through a mutually agreeable transaction between two entities (buyer and seller), and the proceeds of common-law
crime non-consensually, by force or fraud inflicted on one party by another.
Rent, by contrast with these two, is obtained when a third party deprives one party to a transaction of access to otherwise
accessible transaction opportunities, making the nominally "consensual" transaction between the other two parties a
rent-collection opportunity for the second. The abnormal profits of the illegal drug
trade are considered rents by this definition, as they are neither legal profits nor the proceeds of common-law crimes.
Taxi medallions are another commonly referenced example of rent seeking. To the extent that the
issuing of medallions constrains overall supply of taxi services (rather than ensuring competence or quality), forbidding
competition by non-medallion taxis makes the otherwise consensual transaction of taxi service a forced transfer of wealth from
the passenger to the medallion holder. Some economists hold that governments should reform their tax
systems, so as to look first to recovering the rents that they empower some private interests to extract from others (including
those accruing to land and pollution permits) rather than levying financial penalties on those who engage in productive economic
activities and consensual transactions.
Rent seeking is held to occur often in the form of lobbying for economic regulations such as
tariffs. Regulatory capture is a related concept which refers to 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.
The concept of rent seeking has been applied to corruption by bureaucrats who solicit and
extract ‘bribe’ or ‘rent’ for applying their legal but discretionary authority for awarding legitimate or illegitimate benefits
to clients.[6] For example, many tax officials take bribe
for lessening the tax burden of the tax payers. Faizul Latif Chowdhury suggested
that ‘bribery’ is a kind of rent-seeking by the government officials.
Possible consequences
From a theoretical standpoint, the moral hazard of rent seeking can be considerable. If
"buying" a favorable regulatory environment is cheaper than building more efficient production, a firm will choose the former
option, reaping incomes entirely unrelated to any contribution to total wealth or well-being. This results in a sub-optimal
allocation of resources — money spent on lobbyists and counter-lobbyists rather than on research and development, improved business practices, employee training, or additional capital goods — which
retards economic growth. Claims that a firm is rent-seeking therefore often accompany
allegations of government corruption, or the undue influence of special interests.[7]
Rent seeking may be initiated by government agents, such agents 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.[8] It has been shown that rent-seeking by bureaucracy can push up the cost of production of public goods. It has also been shown that rent-seeking by
tax officials may cause loss in revenue to the public exchequer.[9]
Rent-seeking behavior, in terms of land rent, figures in Georgist economic theory, where the
value of land is largely attributed to provision of government services and infrastructure (e.g., road building, provision of
public schools, maintenance of peace and order, etc.) and the community in general, rather than resulting from any action or
contribution by the landowner.
See also
Notes
- ^ Tullock, Gordon (1967). "The Welfare Costs
of Tariffs, Monopolies, and Theft". Western Economic Journal (now Economic Inquiry) 5: 224-32.
- ^ Krueger, Anne (1974). "The Political
Economy of the Rent-Seeking Society". American Economic Review 64: 291-303.
- ^ Kelley L. Ross. Rent-Seeking, Public Choice, and The Prisoner's Dilemma. Retrieved on 2007-02-11.
- ^ Robert Schenk. Rent Seeking.
Retrieved on 2007-02-11.
- ^ Pasour, E.C.. "Rent Seeking: Some Conceptual Problems
and Implications". The Review of Austrian Economics.
- ^ Chowdhury, Faizul Latif
(2006). Corrupt Bureaucracy and Privatization of Tax Enforcement. Pathak Shamabesh, Dhaka. ISBN
984-8120629.
- ^ Eisenhans, Hartmut (1996). State, class, and development. Radiant Publishers. ISBN
978-8170272144.
- ^ (2006) in Michael Dauderstädt,
Arne Schildberg (editors): Dead Ends of Transition: Rentier Economies and Protectorates. Campus Verlag. ISBN
978-3593381541.
- ^ Chowdhury, Faizul Latif
(2006). Corrupt Bureaucracy and Privatization of Tax Enforcement. Pathak Shamabesh, Dhaka. ISBN
984-8120629.
References
- Chowdhury, Faizul Latif (2006). Corrupt Bureaucracy and Privatization of Tax Enforcement. Pathak Shamabesh, Dhaka, pp.25-34. ISBN
9848120629.
- Tullock, Gordon (1987). "Rent seeking",
The New Palgrave: A Dictionary of Economics. Palgrave
Macmillan, vol. 4, pp.147-149. ISBN 0333372352.
- Tullock, Gordon (2005). The Rent-Seeking Society : The Selected Works of Gordon Tullock, Vol. 5.
External links
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