Rent-seeking

In economics, rent seeking is the process by which an individual, organization, or firm seeks to capture economic rent through exploitation or manipulation of the economic environment, rather than through trade and the production of added wealth. 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 regulations or other government decisions that may affect consumers or businesses. There are evidently few people in modern industrialized countries who do not gain something, directly or indirectly, through rent seeking of one sort or another -- but even fewer who obtain any net benefit from rent seeking in the aggregate.

Most studies of rent seeking focus on efforts to acquire special monopoly privileges, such as government regulation of free enterprise competition, though the term itself refers to 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 apt label for the former type of rent seeking. 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 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 e.g., cohabiting siblings with the same incomes, spending and investment decisions, etc.

The phenomenon of rent seeking was first identified in connection with monopolies by Gordon Tullock, in a paper in 1967. The phrase rent seeking itself, however, was coined in 1974 by Anne Krueger in another influential paper, "The Political Economy of the Rent-Seeking Society" (1974). The word "rent" in this sense is not directly equivalent to its usual use meaning a payment on a lease, although it stems from Adam Smith's division of incomes into profit, wage, and rent. [1] Rent-seeking behavior is distinguished in theory from profit-seeking behavior, in which entities seek to extract value by engaging in mutually beneficial transactions. [2] Some claim that, in practice, there are difficulties distinguishing between beneficial profit seeking and detrimental rent seeking. The clarity of this distinction is a function of the relevant definitions employed. Often a distinction is drawn between rents obtained legally through political power and the proceeds of private common-law crimes such as fraud, embezzlement and theft. One may accordingly think of "profit" as being 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 only when a third party, normally government, 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 profits of the illegal drug trade are evidently rents by this definition, as they are certainly neither legal profits nor the proceeds of common-law crimes. Taxi medallions are another commonly referenced example of rent seeking: by forbidding competition by non-medallion taxi services, government makes the apparently consensual transaction of taxi service effectively a forcible transfer of wealth from the passenger to the medallion holder.

Given that governments must obtain their revenues from somewhere, there is a prima facie case that for both efficiency and justice, they should look first to recovering the rents they empower some private interests to extract from others, rather than levying financial penalties on those who engage in productive economic activities and consensual transactions. Current taxes are a very blunt instrument in recovering land rents (through property and capital gains taxes) or the rents accruing to privileges enjoyed by utility monopolies, broadcast spectrum owners, mining and oil companies, licensed professionals such as lawyers and doctors, unionized employees, patent and copyright holders, etc., etc. through income and profits taxes.

Rent seeking often occurs in the form of lobbying for economic regulations such as tariffs. For instance, if a domestic corporation producing widgets can lobby the legislature to levy a tariff upon widget imports, then that corporation can sell its widgets at a higher price. If the legislature bans the import of widgets, or effectively bans them through high tariffs, then the additional price extracted can be quite significant. Collusion between firms and the government agencies assigned to regulate them can enable extensive rent-seeking behavior, especially when the government agency must rely on the firms for knowledge about the market.

The moral hazard of rent seeking can be considerable. If a firm can calculate the cost of lobbying, bribing, or otherwise causing the government to enact a favorable regulation, then it can compare this cost with that needed to accomplish a similar benefit within the market—for instance, by capital improvements or increased efficiency. If "buying" a favorable regulatory environment is cheaper than building more efficient production, then a firm may reap 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 is money that cannot be invested in research and development, improved business practices, employee training, or additional capital goods) and retards productivity growth.

Claims that a firm is rent-seeking therefore often accompany allegations of government corruption, or the undue influence of special interests.

Rent seeking may be initiated by government agents. The agents may solicit bribes or other favors from the individuals or firms that stand to gain from having special economic privilege. This feature opens up the possibility of rent seeking as the basis for a new political economy. In such a political economy, exploitation of the consumer is a cooperative endeavor by rent-seeking individuals, private institutions, and government agents.

Rent-seeking behavior, in terms of land rent, figures in Georgist political 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

• Principal-agent problem
• Public choice theory

References

• Anne O. Krueger, 1974, "The Political Economy of the Rent-Seeking Society," American Economic Review, 64, 291-303

• Gordon Tullock, 1967, "The Welfare Costs of Tariffs, Monopolies, and Theft," Western Economic Journal (now Economic Inquiry), 5, 224-32

• _____, 1987, "rent seeking," The New Palgrave: A Dictionary of Economics, v. 4, 147-149

External links

• http://www.edcnews.se/Research/RentSeeking.html
• http://perspicuity.net/politics/rentseek.html
• http://www.friesian.com/rent.htm