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In economics, rent seeking is the process by which an individual, organization, or firm seeks to gain through 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 taking actions which improve productivity, such as by imposing regulations or other government decisions that may affect consumers or businesses.
Most studies of rent seeking focus on efforts to acquire special monopoly privilege, such as government regulation of free enterprise competition. The term "monopoly privilege rent seeking" is an apt label. 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 aims to reduce tax rates on married couples only.
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 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. Rent-seeking behavior is distinguished in theory from profit-seeking behavior, in which entities seek to extract value by engaging in mutually beneficial transactions. [http://ingrimayne.saintjoe.edu/econ/government/RentSeeking.html Some claim that, in practice, there are difficulties distinguishing between beneficial profit seeking and detrimental rent seeking. Making this distinction clearer are empirical studies on the subject.
Rent seeking is often associated with lobbying for economic regulations such as tariffs. For instance, if FooCorp, a domestic producer of widgets, can lobby the legislature to levy a tariff upon widget imports, then FooCorp 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 tasked to regulate them can be a haven for 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 uncompensated. This would result in a sub-optimal allocation of resources (money spent on lobbyists instead of invested in improved business practice) and retard 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 the actions of the government (for example, road building) and the community in general, rather than being produced by the land owner.
See also
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
"Rent seeking"