rent seeking

In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic or political environment, rather than by earning profits through economic transactions and the production of added wealth.

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 practice of appropriating a portion of production by gaining ownership or control of land.

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 can impose substantial losses on society.

Studies of rent seeking focus on efforts to capture special monopoly privileges such as government regulation of free enterprise competition.

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.^{[citation needed]}

Development of theory

The phenomenon of rent seeking was first formally identified in connection with monopolies by Gordon Tullock, in a 1967 paper.^[2] The phrase rent seeking itself, however, was coined in 1974 by Anne Krueger in another influential paper.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.Rent-seeking behavior is distinguished in theory from profit-seeking behavior, in which entities seek to extract value by engaging in mutually beneficial transactions.Critics of the concept point out that in practice, there may be difficulties distinguishing between beneficial profit seeking and detrimental rent seeking 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 nominally "consensual" transactions a rent-collection opportunity for the third party.

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^[who?] 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.^[7] For example, many tax officials take bribes 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.^[8]

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. 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.

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