Rent-seeking is when someone tries to get a larger slice of the wealth pie, instead of making the pie bigger. It can lead to unfair advantages and slow economic growth. It’s hard to distinguish from normal business, impacts innovation, and can create income inequality, especially in countries with weak governance.
Origin of Term
The term was first coined by the economist Gordon Tullock in 1967, and further developed by Anne Krueger in 1974.
In this context, “rent” does not refer to the usual concept of payment for use of a property. Rather, it refers to economic rent, which is essentially excess payment that is received for a good beyond the minimum required to bring that good to market.
Types of Rent-Seeking
Rent-seeking can occur in various forms, such as lobbying for economic regulations like tariffs and trade restrictions that favor a certain group or industry, manipulating the political environment to receive subsidies, or using exclusive access to natural resources.
Cost of Rent-Seeking
Rent-seeking activities can impose costs on an economy. These costs are not just monetary – they can include inefficient allocation of resources, slowed economic growth, and income inequality.
Rent-Seeking and Corruption
Rent-seeking is closely associated with corruption. When public officials use their position to create rents (via policy, regulation, etc.) and then capture those rents, it is considered a form of corruption.
Public Choice Theory
Rent-seeking is a central concept in public choice theory, which applies economic thinking to political decision making. It suggests that politicians and government officials, like anyone else, will use their power to further their own interests.
Critiques of Rent-Seeking Concept
Critics argue that it can be challenging to distinguish between legitimate business practices and rent-seeking, and that the concept may be used to delegitimize certain types of regulation or public spending. Others question the underlying assumption that economic transactions could ever be completely free of rent-seeking behavior.
Measurement of Rent-Seeking
Measuring rent-seeking is a challenging task due to its inherent nature. It often involves quantifying the costs of policies that favor certain groups and the opportunity costs of resources devoted to non-productive rent-seeking activities. Several methodologies have been proposed, but no single universally accepted method exists.
Understanding rent-seeking can guide policy decisions, especially in the areas of regulation, antitrust laws, and government spending. Policies that minimize opportunities for rent-seeking can lead to a more efficient and equitable economy.