Rent Seeking
Rent seeking is the use of resources to obtain benefits from the political process, such as tariffs, subsidies, licences, or monopolies, rather than to create new wealth. The term, introduced by Anne Krueger and developed by Gordon Tullock, describes the competition for artificially created rents and its social costs.
The Concept
Rents arise when policies create returns above what would prevail in competitive markets. A tariff raises the returns to domestic producers, a licence restricts entry and raises the returns to incumbents, and a subsidy transfers income to favoured activities. Where such rents exist, individuals and firms have an incentive to devote resources to obtaining them.
Rent seeking is the expenditure of resources on obtaining these rents, including lobbying, legal action, and the design of favourable regulations. Because the resources used in rent seeking do not produce goods or services, they represent a social cost additional to the distortion caused by the policy itself.
Social Costs
The social cost of rent seeking includes the resources devoted to the competition for rents and the distortions caused by the policies that create the rents. Where the competition for rents is intense, the resources expended may approach the value of the rents themselves, so that the net benefit of the policy to the favoured group is small while the social cost is large.
Rent seeking can also distort the allocation of talent, drawing able individuals into activities that create no value, such as lobbying and litigation, at the expense of productive activities. The cumulative effect on growth and innovation can be significant.
Forms of Rent Seeking
Rent seeking takes many forms. Lobbying for tariffs and subsidies, bidding for government contracts and concessions, seeking regulatory protection from competition, and litigating over property rights are all examples. Rent seeking can also occur within organisations, where groups compete for internal resources and privileges.
The forms that rent seeking takes depend on the structure of political institutions and on the rents available. Where institutions are transparent and competition is open, the scope for rent seeking is reduced, though it is never eliminated.
Policy Implications
The analysis of rent seeking implies that policies should be assessed not only by their direct effects but also by the incentives they create for rent seeking. Policies that create large rents invite competition for them, and the social cost may exceed the intended benefits.
Institutional reforms that reduce the scope for rent seeking include the elimination of unnecessary restrictions on entry, the use of transparent and competitive mechanisms for allocating rights and contracts, and the strengthening of accountability. The analysis also informs the assessment of regulation and of the design of institutions, complementing the analysis of market failure and government failure.
Measuring Rent Seeking
Measuring rent seeking is difficult, since the resources devoted to it, including lobbying and litigation, are not separately identified in the data. Approaches include the analysis of lobbying expenditures, the estimation of the effects of protection on output and prices, and the comparison of regulated and unregulated markets.
Estimates of the cost of rent seeking vary widely, reflecting differences in methodology and in the sectors analysed. The costs can be substantial, particularly in economies with extensive protection and limited competition, and they constitute an important element of the overall cost of intervention.
Rent Seeking and Growth
Rent seeking can impede growth by diverting resources from productive activities and by distorting the allocation of talent. Where the returns to lobbying and to obtaining favours are high, able individuals may be drawn into these activities rather than into innovation and production.
The effect on growth is difficult to measure, but the analysis suggests that the cumulative effect of rent seeking can be significant. The elimination of rents and the reduction of the scope for their capture are therefore important for growth, and they inform the design of reforms to open markets and to strengthen institutions.
Institutions and Constraints
The scope for rent seeking depends on the institutional environment. Where institutions are transparent, competition is open, and the allocation of rights and privileges is rules-based, the scope for rent seeking is reduced. Where discretion is broad and oversight is weak, the scope is greater.
Institutional reforms that reduce rent seeking include the liberalisation of entry, the use of auctions and competitive processes for allocating scarce rights, the strengthening of transparency and accountability, and the improvement of the legal system. The design of these reforms reflects the analysis of the incentives that generate rent seeking and of the institutions that constrain it.
International Dimensions
Rent seeking has international dimensions, since trade policy creates rents that attract lobbying both at home and abroad. The analysis of trade negotiations and of the political economy of protection draws on the theory of rent seeking, and it informs the design of international agreements that constrain the scope for protection.
The analysis also applies to international organisations and to the allocation of resources among countries, where the competition for funding and for favourable treatment can generate rent seeking. The principles developed in the analysis of domestic rent seeking inform the assessment of these international processes.