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{{Short description|Growing one's existing wealth without creating new wealth}}
{{Use dmy dates|date=November 2018}}
{{Capitalism sidebar}}
{{Competition law}}
'''Rent-seeking''' is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth.<ref>
Compare: {{oed | rent-seeking}} </ref>
Rent-seeking activities have negative effects on the rest of society. They result in reduced [[economic efficiency]] through [[allocation of resources|misallocation of resources]], stifled [[Competition (economics)|competition]], reduced [[wealth creation]], lost [[government revenue]], heightened [[income inequality]],<ref>{{cite web |url= https://www.imf.org/external/pubs/ft/wp/2001/wp0115.pdf |title= Rent-seeking and Endogenous Income Inequality |author= IMF |access-date= 30 April 2014}}</ref><ref name="Deaton2023"/> risk of growing
Successful [[regulatory capture|capture of regulatory agencies]] (if any) to gain a [[coercive monopoly]] can result in advantages for rent-seekers in a [[market (economics)|market]] while imposing disadvantages on their uncorrupt competitors. This is one of many possible forms of rent-seeking behavior.
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The term rent, in the narrow sense of [[economic rent]], was coined by the British 19th-century economist [[David Ricardo]],<ref>{{cite web |url=http://www.econlib.org/library/Enc/RentSeeking.html |title=Rent Seeking |last= Henderson|first= David R. |author-link=David R. Henderson |publisher=[[Econlib.org]]}}<!-- This is an original essay by Henderson, not available via other sources. --></ref> but rent-seeking only became the subject of durable interest among economists and political scientists more than a century later after the publication of two influential papers on the topic by [[Gordon Tullock]] in 1967,<ref>{{cite journal |last=Tullock |first=Gordon |year=1967 |title=The Welfare Costs of Tariffs, Monopolies and Theft |journal=Western Economic Journal |volume=5 |pages=224–232}}</ref> and [[Anne Krueger]]<ref name=Krueger1974>{{cite journal |last=Krueger |first=Anne |year=1974 |title=The Political Economy of the Rent-Seeking Society |journal=American Economic Review |volume=64 |issue=3 |pages=291–303 |jstor=1808883}}</ref> in 1974. The word "rent" does not refer specifically to payment on a lease but rather to [[Adam Smith]]'s division of incomes into [[Profit (economics)|profit]], wage, and economic rent. The origin of the term refers to gaining control of [[land (economics)|land]] or other natural resources. {{Citation needed|date=November 2022}}
[[Georgist]] economic theory describes rent-seeking in terms of land rent, where the value of land largely comes from the natural resources native to the land, as well as collectively paid for services, for example:
''Rent-seeking'' is an attempt to obtain economic rent (i.e., the portion of income paid to a [[factor of production]] in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by [[value added|creating new wealth]]. Rent-seeking implies extraction of uncompensated value from others without making any contribution to [[productivity (economics)|productivity]]. Because the nature of rent-seeking implies a fixed cost payment, only wealthy participants engage in these activities as a means of protecting their wealth from expropriation.<ref>{{cite book |last=Chakraborty |first=Shankha |year=2005 |title=Rent Seeking |series=IMF Working Papers |volume=05 |publisher=International Monetary Fund |issue=43 |page=1 |doi=10.5089/9781451860627.001 |isbn=978-1-4518-6062-7 |s2cid=15557383 | issn=1018-5941}}</ref>
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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|date=January 2022}} However, various rent-seeking behaviors are illegal, such as the forming of [[cartel]]s or the [[Bribery|bribing]] of politicians.
Rent-seeking is distinguished in theory from [[Profit (economics)|profit-seeking]], in which entities seek to extract value by engaging in mutually beneficial transactions.<ref>{{cite web |url=http://ingrimayne.saintjoe.edu/econ/government/RentSeeking.html |title=Rent Seeking |first=Robert|last= Schenk |work=CyberEconomics |access-date=11 February 2007 |archive-url=https://web.archive.org/web/20060103062417/http://ingrimayne.saintjoe.edu/econ/government/RentSeeking.html |archive-date=3 January 2006}}</ref> Profit-seeking in this sense is the creation of wealth, while rent-seeking is "[[profiteering (business)|profiteering]]" by using social institutions, such as but not limited to the power of the state, to redistribute wealth among different groups without creating new wealth.<ref>{{cite journal |last=Conybeare |first=John A. C. |year=1982 |title=The Rent-Seeking State and Revenue Diversification |journal=[[World Politics]] |volume=35 |issue=1 |pages=25–42 |doi=10.2307/2010278 |jstor=2010278 |s2cid=154601921 }}</ref> In a practical context, income obtained through rent-seeking may contribute to [[Profit (accounting)|profits in the standard, accounting sense of the word]].{{Citation needed|date=September 2021}}
===Tullock paradox===
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.<ref name="tullock1980">{{cite book |last=Tullock |first=Gordon |year=1980 |chapter=Efficient rent-seeking |title=Toward a theory of the rent-seeking society |editor=Buchanan, J. |editor2=Tollison, R. |editor3=Tullock, G. |publisher=Texas A&M Press |place=College Station |pages=97–112 |isbn=0-89096-090-9}}</ref><ref name="connes">{{cite periodical |date=September 2003|title=Loss Aversion and the Tullock Paradox |last1=Connes |first1=Richard |last2=Hartley |first2=Roger |citeseerx=10.1.1.624.4082 |periodical=Discussion Papers in Economics |number=3/17 |url=https://www.researchgate.net/publication/5159311 |via=ResearchGate}}</ref>
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
====Possible explanations====
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The classic example of rent-seeking, according to [[Robert Shiller]], is that of a property owner who installs a chain across a river that flows through their land and then hires a collector to charge passing boats a fee to lower the chain. There is nothing productive about the chain or the collector, nor do passing boats get anything in return. The owner has made no improvements to the river and is not adding value in any way, directly or indirectly, except for themselves. All they are doing is finding a way [[Parasitism|to obtain money]] from something that used to be free.<ref>{{cite web |last=Shiller |first=Robert |author-link=Robert Shiller |date=20 September 2013 |title=The Best, Brightest and Least Productive? |url=http://www.project-syndicate.org/commentary/the-rent-seeking-problem-in-contemporary-finance-by-robert-j--shiller |archive-url=https://web.archive.org/web/20211016052828/https://www.project-syndicate.org/commentary/the-rent-seeking-problem-in-contemporary-finance-by-robert-j--shiller-2013-09 |archive-date=October 16, 2021 |website=project-syndicate.org |publisher=[[Project Syndicate]]}}</ref>
An example of rent-seeking in a modern economy is spending money on lobbying for government subsidies
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.<ref name="Chowdhury 2006">{{cite book |last=Chowdhury |first=Faizul Latif |year=2006 |title=Corrupt Bureaucracy and Privatization of Tax Enforcement in Bangladesh |publisher=Pathak Shamabesh, Dhaka |isbn=978-984-8120-62-0}}</ref> For example, taxpayers may bribe officials to lessen their tax burden.
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Rent-seeking through government enterprise takes the form of seeking [[subsidies]] and avoiding [[tariffs]]. This seems like the actions of a firm looking for investment in [[productivity]] but in doing so creates an exclusionary effect for more productive firms.<ref>{{cite journal |first1=Liu |last1=Baohua |first2=Lin |last2=Yan |first3=Chan |last3=Kam.C |first4=Fung |last4=Hung-Gay |title=The dark side of rent-seeking: The impact of rent-seeking on earnings management |year=2018 |volume=91 |issue=1 |pages=94–107 |journal=Journal of Business Research |doi=10.1016/j.jbusres.2018.05.037 |s2cid=158315455 }}</ref>
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
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.<ref>{{cite journal |last=Shannon |first=Mitchell |year=1993 |title=The Welfare Effects of Rent-Saving and Rent-Seeking |journal=The Canadian Journal of Economics |publisher=Wiley on behalf of the Canadian Economics Association |volume=26 |issue=3 |pages=660–669 |doi=10.2307/135893 |jstor=135893}}</ref>
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===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.<ref name="Samuels 1992 111–128">{{cite book |chapter-url=https://link.springer.com/chapter/10.1007/978-1-349-12377-3_6 |last= Samuels |first=W. J. |title= Essays on the Economic Role of Government |chapter= A Critique of Rent-seeking Theory |year=1992 |volume=2 |pages=111–128 |doi=10.1007/978-1-349-12377-3_6|isbn= 978-1-349-12379-7 }}</ref> 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 [[scarcity|scarce resources]] and it's how we
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.<ref>{{cite journal |url=https://www.mises.org/journals/rae/pdf/rae1_1_8.pdf |last=Pasour |first=E. C. |title=Rent Seeking: Some Conceptual Problems and Implications |journal=[[The Review of Austrian Economics]] |year=1987 |volume=1 |issue=1 |pages=123–143 |doi=10.1007/BF01539337 |s2cid=18809359 }}</ref>
In 2023, [[Angus Deaton]] wrote:
<blockquote>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.<ref name="Deaton2023">{{cite book |last=Deaton|first=Angus|author-link=Angus Deaton|date=2023 |title=Economics in America: An Immigrant Economist Explores the Land of Inequality|url=https://books.google.com/books?id=guS3EAAAQBAJ&pg=PA95|location= |publisher=[[Princeton University Press]] |page=95 |isbn=978-0691247625}}</ref></blockquote>
== Possible consequences ==
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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 labour|exploitation]] of the consumer.<ref name="Dauderstädt">{{cite book |editor=Michael Dauderstädt |editor2=Arne Schildberg |title=Dead Ends of Transition: Rentier Economies and Protectorates |year=2006 |publisher=Campus Verlag |isbn=978-3-593-38154-1 |url-access=registration |url=https://archive.org/details/deadendsoftransi0000unse }}</ref> It has been shown that rent-seeking by [[bureaucracy]] can push up the cost of production of [[Public good (economics)|public good]]s.<ref name=Niskanen>{{cite book |last=Niskanen |first=William |year=1971 |title=Bureaucracy and Representative Government |url=https://archive.org/details/bureaucracyrepre0000nisk |url-access=registration |publisher=Aldine-Atherton, Chicago|isbn=978-0-202-06040-8 }}</ref> It has also been shown that rent-seeking by tax officials may cause loss in revenue to the public exchequer.<ref name="Chowdhury 2006" />
[[Mancur Olson|Mançur Olson]] traced the historic consequences of rent seeking in ''The Rise and Decline of Nations''. As a country becomes increasingly dominated by organized interest groups, it loses economic vitality and falls into decline. Olson argued that countries that have a collapse of the political regime and the interest groups that have coalesced around it can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. An example of this is [[Japanese post-war economic miracle|Japan]] after World War Two. But new coalitions form over time, once again shackling society
A study by Laband and [[John Sophocleus]] in 1988<ref name=Leeson>{{Cite book |jstor=j.ctt7t3fh|title=The Invisible Hook: The Hidden Economics of Pirates|last1=Leeson|first1=Peter T.|year=2009|isbn=978-0-691-15009-3 |publisher= Princeton University Press|page=191|title-link=The Invisible Hook}}</ref> 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
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.<ref name=Gradstein>{{cite journal |last=Gradstein |first=Mark |year=1993 |title=Rent Seeking and the Provision of Public Goods |journal=The Economic Journal |volume=103 |issue=420 |pages=1236–1243 |doi=10.2307/2234249 |jstor=2234249 }}</ref>
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[[Category:Public choice theory]]
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