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In [[economics]], an economic agent is said to exhibit '''rent-seeking''' behavior whenever it attempts to derive [[economic rent]] by manipulating the social/political environment in which economic activities occur. An example of rent-seeking is the limitation of access to skilled occupations imposed by medieval [[guild]]s.
In [[economics]], an economic agent is said to exhibit '''rent-seeking''' behavior whenever it attempts to derive [[economic rent]] by manipulating the social/political environment in which economic activities occur. An example of rent-seeking is the limitation of access to skilled occupations imposed by medieval [[guild]]s and modern [[License|licensing]] practices.


Many current studies of rent-seeking focus on [[Regulatory capture|efforts to capture]] various [[coercive monopoly|monopoly privileges]] stemming from government regulation of [[Capitalism|free enterprise]] [[competition]]. The term itself derives, however, from the far older practice of appropriating a portion of production by gaining ownership or control of land.
Many current studies of rent-seeking focus on [[Regulatory capture|efforts to capture]] various [[coercive monopoly|monopoly privileges]] stemming from government regulation of [[Capitalism|free enterprise]] [[competition]]. The term itself derives, however, from the far older practice of appropriating a portion of production by gaining ownership or control of land.

Revision as of 23:10, 30 April 2011

In economics, an economic agent is said to exhibit rent-seeking behavior whenever it attempts to derive economic rent by manipulating the social/political environment in which economic activities occur. An example of rent-seeking is the limitation of access to skilled occupations imposed by medieval guilds and modern licensing practices.

Many current studies of rent-seeking focus on efforts to capture various monopoly privileges stemming from government regulation of free enterprise competition. The term itself derives, however, from the far older 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. Rent-seeking agents will spend money in socially unproductive ways, such as political lobbying, in order to attain, maintain or increase monopoly power.

In modern industrialized countries, economic benefits derived by most people involve some form of rent-seeking, but in the aggregate such behaviors may result in substantial social losses.

Studies of rent-seeking focus on efforts to capture special monopoly privileges such as government regulation of free enterprise competition.[1]

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 shifting the government tax burden or government spending allocation, for instance. [citation needed]

Development of theory

The phenomenon of rent-seeking in connection with monopolies was first formally identified in 1967 by Gordon Tullock.[2] The expression rent-seeking was coined in 1974 by Anne Krueger.[3] The word "rent" does not refer here to payment on a lease but stems instead from Adam Smith's division of incomes into profit, wage, and rent.[4] Rent-seeking behavior is distinguished in theory from profit-seeking behavior, in which entities seek to extract value by engaging in mutually beneficial transactions.[5]

Critics of the concept point out that in practice, there may be difficulties distinguishing between beneficial profit-seeking and detrimental rent-seeking.[6] 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 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.

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, tax officials may 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 may 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.[9] It has been shown that rent-seeking by bureaucracy can push up the cost of production of public goods.[10] It has also been shown that rent-seeking by tax officials may cause loss in revenue to the public exchequer.[7]

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

References

  1. ^ Feenstra, Robert; Taylor, Alan (2008). "International Economics". Worth Publishers, New York. ISBN 978-0-7167-9283-3
  2. ^ Tullock, Gordon (1967). "The Welfare Costs of Tariffs, Monopolies, and Theft". Western Economic Journal. 5 (3): 224–232. doi:10.1111/j.1465-7295.1967.tb01923.x. {{cite journal}}: Cite has empty unknown parameters: |month= and |coauthors= (help)
  3. ^ Krueger, Anne (1974). "The Political Economy of the Rent-Seeking Society". American Economic Review. 64 (3): 291–303. {{cite journal}}: Unknown parameter |doi_brokendate= ignored (|doi-broken-date= suggested) (help)
  4. ^ Kelley L. Ross. "Rent-Seeking, Public Choice, and The Prisoner's Dilemma". Retrieved 2007-02-11.
  5. ^ Robert Schenk. "Rent Seeking". Retrieved 2007-02-11.
  6. ^ Pasour, E.C. "Rent Seeking: Some Conceptual Problems and Implications" (PDF). The Review of Austrian Economics.
  7. ^ a b Chowdhury, Faizul Latif (2006). Corrupt Bureaucracy and Privatization of Tax Enforcement. Pathak Shamabesh, Dhaka. ISBN 984-8120629.
  8. ^ Eisenhans, Hartmut (1996). State, class, and development. Radiant Publishers. ISBN 978-8170272144.
  9. ^ Michael Dauderstädt, Arne Schildberg (editors), ed. (2006). Dead Ends of Transition: Rentier Economies and Protectorates. Campus Verlag. ISBN 9783593381541. {{cite book}}: |editor= has generic name (help)
  10. ^ Niskanen, William (1971). Bureaucracy and Representative Government. Aldine-Atherton, Chicago.

Further reading

External links

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