Rent-seeking: Difference between revisions

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'''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}} -– "'''rent-seeking''' n. ''Economics''[:] the fact or process of seeking to gain larger profits by manipulating public policy or economic conditions, esp. by means of securing beneficial subsidies or tariffs, making a product artificially scarce, etc. [...]"

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 political[[corruption]] briberyand [[cronyism]], decreased [[public trust]] in institutions and potential national decline.

Attempts atSuccessful [[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.

[[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: [[State school]]sschools, law enforcement, fire prevention and, mitigation services, etc. Rent seeking to the Georgist does not include those persons that may have invested substantial capital improvements to a piece of land, but rather those that perform in their role as mere titleholder. This is the dividing line between a rent-seeker and a [[property developer]], which need not be the same person.{{Citation needed|date=November 2022}}

''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 |journalseries=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>

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}}

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 up toapproaching the value of the profits derived from the subsidies themselves, when in fact only a small fraction of that is spent.<ref>{{cite book|first1=Luigi|last1=Zingales|title=A Capitalism for the People: Recapturing the Lost Genius of American Prosperity|url=https://books.google.com/books?id=USzXmw5CJ_MC|publisher=Basic Books|date=5 June 2012|isbn=978-0-465-02947-1|via=Google Books}}</ref>

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 histheir 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 himselfthemselves. All hethey isare 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 in order to be given wealth that has already been created, or to impose regulations on competitors, in order to increase one's own market share.<ref>{{cite web |last1=Samples |first1=John |title=An Introduction to Rent Seeking |url= https://www.libertarianism.org/blog/introduction-rent-seeking |work=libertarianism.org |date=May 30, 2012 }}</ref> Another example of rent-seeking is the limiting of access to lucrative occupations, as by medieval [[guild]]s or modern state certifications and [[licensure]]s. According to some libertarian perspectives, [[taxi]] licensing is a textbook example of rent-seeking.<ref>{{cite book |last1=McTaggart |first1=Douglas |title=Economics |date=2012 |publisher= Pearson Higher Education |isbn=978-1-4425-5077-3 |page=224}}</ref> To the extent that the issuing of licenses constrains overall supply of taxi services (rather than ensuring competence or quality), forbidding competition from other [[vehicles for hire]] renders the (otherwise consensual) transaction of taxi service a forced transfer of part of the fee, from customers to taxi business proprietors.

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.<ref>{{cite journal |last=Moberg |first=Lotta |title=Liberalizing rent-seeking: How export processing zones can save or sink an economy |year=2018 |volume=33 |issue=4 |pages=61–89 |journal=Journal of Private Enterprise |publisher=Association of Private Enterprise Education |location=Texas|issn=0890-913X |url-access=registration |url= http://journal.apee.org/index.php?title=2018_Journal_of_Private_Enterprise_Vol_33_No_4_Winter_parte4}}</ref>

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 journalbook |chapter-url=https://link.springer.com/chapter/10.1007/978-1-349-12377-3_6 |last= Samuels |first=W. J. |title=A Critique of Rent-seeking Theory |journal=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 utiliseuse these resources which drives [[supply and demand]], and the notion of "wasted resources" rejects our preferences to allocate those resources.<ref name="Samuels 1992 111–128"/>

[[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 in order to redistribute wealth and income to themselves. However, social and technological changes have allowed new enterprises and groups to emerge.<ref name=Mokyr>{{Cite journal | url=https://cpb-us-e1.wpmucdn.com/sites.northwestern.edu/dist/3/1222/files/2018/02/Mokyr-Nye-Southern-EconJournal-2k1u4v2.pdf | archive-url=https://web.archive.org/web/20191216230454/https://cpb-us-e1.wpmucdn.com/sites.northwestern.edu/dist/3/1222/files/2018/02/Mokyr-Nye-Southern-EconJournal-2k1u4v2.pdf | archive-date=2019-12-16 | title=Distributional Coalitions, the Industrial Revolution, and the Origins of Economic Growth in Britain| journal=Southern Economic Journal| volume=74| issue=1| pages=50–70| year=2007| last1=Mokyr| first1=Joel| last2=Nye| first2=John V. C.| doi=10.1002/j.2325-8012.2007.tb00826.x |id=[https://EconPapers.repec.org/RePEc:sej:ancoec:v:74:1:y:2007:p:50-70 RePEc:sej:ancoec:v:74:1:y:2007:p:50-70]}}</ref>

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 in order 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".<ref name=Dougan>{{cite journal |last=Dougan |first=William R. |year=1991 |title=The Cost of Rent Seeking: Is GNP Negative? |journal=Journal of Political Economy |volume=99 |issue=3 |pages=660–664 |doi=10.1086/261773 |s2cid=154489617 }}</ref>

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.<ref>{{cite web |last1=Nannestad |first1=Peter |title=Taxing the rich or the poor?: Immigrants on the dole as the socially optimal policy outcome for rational egalitarians |url=https://www.researchgate.net/publication/242395368 |website=researchgate |publisher=Res |access-date=3 May 2022}}</ref> Alternatively, productive migrants are incentivised to leave rent-seeking societies, possibly resulting in further economic decline.<ref>{{cite webbook |last1=Hillman |first1=Ayre |title=The Elgar Companion to Public Choice, Second Edition |chapter=Rent Seeking |date=2013 |pages=307–330 |chapter-url=https://www.researchgate.net/publication/286953357 |websitedoi=researchgate10.4337/9781849802857.00032 |access-dateisbn=3 May9781849806039 2022}}</ref>

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.<ref>{{cite webjournal |last1=Laband |first1=David |last2=Sophocleus |first2=John |title=Measuring rent-seeking |journal=Public Choice |date=2019 |volume=181 |issue=1–2 |pages=49–69 |url=https://www.researchgate.net/publication/325879949 |websitedoi=researchgate10.1007/s11127-018-0566-9 |access-dates2cid=3 May254934890 2022}}</ref>

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