Rent Seeking defined

تعریف رانت خواری

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Participants •Rent seekers •Context •Economy of Iran •Theory •Institutional Economics •Economic Development •
Posted by Rezwan • Apr 14, 2009 • (0) Comments •
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It's not how much rent you pay for your apartment. Rent-seeking, in the words of The "Economist" is:

Cutting yourself a bigger slice of the cake rather than making the cake bigger. Trying to make more money without producing more for customers.

"The Cake", here, of course, refers to collective resources or benefits.

In "Public Finance", the authors note

...groups of citizens can manipulate the political system to redistribute income toward themselves. Generically, such activity is called rent-seeking - using the government to obtain higher than normal returns ("rents").

Wikipedia defines rent-seeking as:

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.

Examples of "rent seeking"

From the Economist:

Classic examples of rent-seeking, a phrase coined by an economist, Gordon Tullock, include:

• a protection racket, in which the gang takes a cut from the shopkeeper’s PROFIT;

• a CARTEL of FIRMS agreeing to raise PRICES;

• a UNION demanding higher WAGES without offering any increase in PRODUCTIVITY;

• lobbying the GOVERNMENT for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers or some other rivals.

Whether legal or illegal, as they do not create any value, rent-seeking activities can impose large costs on an economy.

Theory of "rent seeking"

Who benefits? Wikipedia notes:

While there may be few people in modern industrialized countries who do not gain something, directly or indirectly, through some form or another of rent seeking, rent seeking in the aggregate imposes substantial losses on society.

Rent seeking is a major cause of "government failure" (as opposed to "market failure"), according to Webster and Lai in Property Rights, Planning and Markets.

It's one of the reasons why those with better access to information and politicians tend to dominate the political process and receive political favors. Rent seeking behavior is what allows this to happen.

Decision makers, administrators (government workers) and lobby groups (special interests) inevitably tend to try to capture benefits for themselves or for those they represent. If they are in a position to redistribute resources, they will bias that distribution in favor of themselves or for those they represent. For example, the national revenue from oil theoretically belongs to all Iranians. It is, however, distributed by government policy and officials. At many points along the line of distributing this revenue, individuals will act as rent-seekers, and siphon off some of the revenue towards their own pockets, or towards a special interest.

Aside from being unfair, the real cost to society from rent-seeking is that it gives rise to inefficiencies.

How would you avoid rent seeking?
You can only avoid rent seeking if government is an omniscient and impartial enforcer of the public good. Most governments, most people, in fact, are neither omniscient nor impartial. So we will always have rent seeking. But we can certainly make moves to improve information (move toward omniscience) and make laws to strengthen impartiality.

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