Rent Seeking

12 Key excerpts on "Rent Seeking"

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  Research on Efficiency and Fairness of Resources Allocationby China's Governmental Administration

  • Hong Sheng, Pu Qian(Authors)
  • 2019(Publication Date)
  • WSPC

    (Publisher)

  If the government has and exerts power to generate rents and other privileges, individuals, or entrepreneurs would discover that it is profitable to engage in rent-seeking behavior. This will lead to policy distortion. Politicians will react accordingly toward rent-seeking activities for their own benefits. According to Buchanan and Tullock (1980), Rent Seeking happens when “resources which should be used on creating value through production in turn are used for competition over distribution of benefits through government”. Overall, Rent Seeking does not allocate resources, but is rather a resource-wasting activity. Colander (Colander, 1984) in his edited book Neoclassical Political Economy: The Analysis of Rent Seeking and DUP Activities defines Rent Seeking as “activates to compete for transfer of wealth and thus a wasteful activity of resources”. Chinese scholars Baowei Hao and Yaqing Mao (2006) defined Rent Seeking as a behavior that “the rent seekers through unproductive means such as bribery, pulling strings, or lobbying to pursue abnormal benefits through the power of the authorities to achieve wealth transfer and resource allocation”. I. Concept of Rent and Its Extension The concept of “rent” in the rent-seeking theory originated from the traditional concept of land rent. Land rent mainly means that when different (land) resources were used for the same purposes but produces different values, it forms a differential (land) rent (Figure 3.1). Absolute rent is the difference between having and not having the factor of production. Economic rent is the difference between a value produced by one factor of production and the cost needed to bring that factor into production. This is equivalent to absolute rent. Figure 3.1. Diagram of land rent. Note : Q 1 is the quantity of maximum supply of resources. People will soon discover that it is possible to create rent through means of human will

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  Institutions and Collective Choice in Developing Countries

  Applications of the Theory of Public Choice

  • Mwangi S. Kimenyi, John Mukum Mbaku(Authors)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  9 Rent Seeking, Institutions and Economic Growth MWANGI S. KIMENYI AND ROBERT D. TOLLISON Introduction Economic rent is a payment to a factor of production above its opportunity cost. Under competitive conditions firms may earn economic rents in the short-run. Such rents attract entry of other producers and are therefore competed away as price falls and output increases. However, governments often create barriers to entry thus permitting incumbent firms to earn economic rents even in the long-run. Government protection against competition comes at a cost: firms must invest resources to influence policymakers. Such investment of resources to secure artificially created transfers is called Rent Seeking (Tollison, 1982). The term Rent Seeking was coined by Anne Krueger (1974), but the insight it refers to is due to Gordon Tullock (1967). Rent Seeking is simply defined as the expenditure of scarce resources to capture wealth transfers (Buchanan, Tollison and Tullock, 1980). That is the process whereby firms and organized interests use the political process in order to earn economic returns in excess of their opportunity costs. Rent Seeking is therefore a social waste because such expenditure of resources does not result in the creation of value. It is important not to confuse socially productive Rent Seeking (profit seeking) with socially wasteful Rent Seeking. Entrepreneurs seek to increase the amount of economic rent that they earn, and in order to do so they may adopt more efficient ways of production. Such improved efficiency allows them to produce at lower cost and thus provides them with the opportunity to earn economic rents. For example, a firm that invests resources and invents a cure for cancer for which a patent is issued would certainly earn huge economic rents. Such investment in resources is called profit seeking and is associated with the creation of value. Not only does the firm that develops such a new product become better-off, but so does society

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  Contemporary Economic Issues in Developing Countries

  • John Baffoe-Bonnie, Mohammed Khayum(Authors)
  • 2003(Publication Date)
  • Praeger

    (Publisher)

  7 Rent-seeking and Economic Growth in Developing Countries John Mukum Mbaku and Mwangi S. Kimenyi INTRODUCTION Economists usually define economic rent as a payment to a production input above and beyond its opportunity cost. In a purely competitive market, firms may be able to earn economic rents in the short run. However, the existence of such rents attracts the entry of other firms who compete them away as supply increases and price falls. Pure competition assumes that the market is charac- terized by free entry and exit such that when incumbent firms earn excess prof- its (i.e., above normal rates of return on investment), others enter. On the other hand, firms that earn economic loss in the long run exit from the market. In many countries, government policies often create barriers to entry, enhancing the ability of incumbent firms to earn economic profits in the long run. Protec- tion from competition, however, is not without cost to the protected firms and to society in general. Firms, in order to secure such protection, may invest sig- nificant amounts of resources in lobbying and other activities to influence the government. The investment of resources to capture artificially created trans- fers is called rent-seeking (Tollison, 1982). Although the term rent-seeking was coined by Anne O. Krueger (1974), the con- cept was developed by Gordon Tullock (1967). Rent-seeking refers to the expend- ing of resources to have the government create transfers and to capture them. It is the process through which firms and organized interests manipulate the political process in order to earn economic returns above and beyond their opportunity costs. Because the scarce resources expended in the process of rent-seeking do not create any value, they are considered a social waste (Buchanan, Tollison, and Tullock, 1980). The productive search for rents (profit-seeking) must not be confused with socially wasteful rent-seeking. Business owners regularly seek ways to increase

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  Transfer Society

  Economic Expenditures on Transfer Activity

  • David N. Laband(Author)
  • 2001(Publication Date)
  • Cato Institute

    (Publisher)

  5. Why So Little Observed Rent- Seeking?

  Introduction

  The political economy of using the public sector to effect direct and indirect wealth transfers is well understood not only by special interest groups, politicians, and bureaucrats (the demanders and suppliers of special interest legislation) but also by an increasing number of private citizens and groups, most notably Public Choice economists. The expenditure of resources by potentially affected parties seeking to influence state-sponsored wealth redistributions is termed ‘‘rent-seeking.’’ To economists, a rent is a value imparted by scarcity. Rents can occur naturally, as is the case when a young model earns enormous sums by virtue of her or his physical beauty. Beauty is scarce and therefore may impart scarcity rents (or value) to individuals who have the good fortune to be blessed genetically with attractive physical features. Indeed, those rents, defined broadly to include monetary and nonmonetary returns, evidently are sufficiently large to induce individuals who have not been blessed genetically with attractive physical features to invest significant sums of time and money undergoing plastic surgery to enhance their physical appearance.

  1 When there is an expected positive return to be had from an investment, individuals invest accordingly.

  Rents also can be contrived or artificial, as happens when the government uses its powers to restrict competition for certain firms in an industry. While the elimination of competitors does not change the market demand for the item being produced, it does make the quantity produced by the protected firm(s) more scarce relative to market demand than in the absence of such protection. This permits the protected firms to raise prices, at least to some extent, and implies a wealth transfer from consumers to the protected producers. Producers who would like to pad their bottom line at the expense of consumers will find it in their interest to lobby Congress and state legislatures for protection against competitors. The seeking of such favors from the state is Rent Seeking.

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  Rent Seeking in China

  • Tak-Wing Ngo, Yongping Wu(Authors)
  • 2008(Publication Date)
  • Routledge

    (Publisher)

  12 Rent Seeking, corruption, and local finance in historical perspective

  R.Bin Wong

  Economists and political scientists speak of Rent Seeking as one symptom of deviation from the free market ideal. Prices include a component above what would obtain in a market with many buyers and sellers; these prices are maintained by entry obstructions into the market that prevent people attracted by the excess returns from joining in and by their presence driving down prices. A monopoly or oligopoly can create barriers to entry that allow them to enjoy rents. Politics also matter. In early modern Europe, rulers set up government monopolies from which they gained revenues in excess of those that would have accrued to a firm operating in a free market. Other rulers set up chartered companies which also enjoyed tremendous market dominance over certain kinds of trade; merchants paid taxes and fees to be granted access to lucrative trades. For their part, early modern European rulers were anxious to expand their revenues as part of their state-building enterprises—building armies and bureaucracies with which to compete with each other and to bring greater order and control over their subject populations. The political economy of rents and Rent Seeking is thus historically connected in a basic way to the twin narratives of European state formation and the development of capitalism—the two large-scale historical processes that have done so much to shape the modern world and equally, if not even more, our understanding of this world in which we live.

  Fiscal strategies sit at the intersection of the state making and capitalist development. Many of the resources for early modern European states came from the expansion of commercial capitalism, which in turn often benefited from state policies of support. Rent Seeking was a basic feature of both. From the perspective of neoclassical economics this was a “bad” thing. But neoclassical economics was not created to explain economic development, let alone political transformations. “Rents” and “Rent Seeking” identify departures from an ideal model of an economy working efficiently to maximize value produced given a certain set of resources. But economies never work in an ideal neoclassical manner. Moreover, reproducing the static efficiency of a neoclassical economy may well produce less output over time than an economy able to grow, in part because economically productive rents have been taken. Take for instance patents. Patents allow the inventor to be rewarded for the risks he undertakes to create a new product or process or a way to make an existing product or process cheaper. Without the promise of some stream of rewards for his efforts, the inventor would not be as likely to undertake his labors because his uncertain gains would definitely be smaller if he could not protect the economic benefits of his invention from being immediately captured by others. Yet restricting access to the information in a patent can keep others from becoming producers in the market and thus reduce the rents that the patent-holder gains through his control of information. Joseph Schumpeter more broadly stressed the rents from innovation and new information as key elements promoting growth.1 More recently, Mushtaq H. Khan has argued that entrepreneurs in developing countries need “rents for learning” to take the risks of taking on foreign technologies which may or may not work as anticipated if they otherwise have other ways of earning rents at a lower risk.2

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  Producing Prosperity

  An Inquiry into the Operation of the Market Process

  • Randall Holcombe(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  9 Rent Seeking in a creative economy One of the factors that works against economic progress is the potential for the appropriation of the gains from entrepreneurship through government. Government exercises a monopoly over the legitimate use of force over people in a society. This force can be used to maintain peaceful and productive interaction among those in an economy, but it can also be used to transfer resources from some people to others. There is always some public interest justification for such transfers, whether it is helping those on the bottom of the economic ladder to get the resources they need to increase their well-being and productivity, or to boost the productivity of those who are already productive by making them more competitive. But because government has the power to transfer resources from some to others, entrepreneurial individuals will see that they have the opportunity to use the force of government to have resources transferred toward them. Anne Krueger called the seeking of transfers, through taxation or through regulation, from some people toward themselves “Rent Seeking”, and the name has stuck. 1 Productive and unproductive entrepreneurship The idea of Rent Seeking was introduced into the modern economics literature by Gordon Tullock, in his article “The Welfare Cost of Tariffs, Monopolies, and Theft.” 2 Since Tullock’s article, Rent Seeking has been discussed almost exclusively as the seeking of transfers through the force of government, but as the title of Tullock’s article indicates, there is a strong similarity between using the force of government to engage in Rent Seeking and engaging in simple theft. One important difference is that in the case of theft it is a one-time activity, whereas if one can employ the force of government to engage in Rent Seeking the transfers can occur into the indefinite future

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  Rent Seeking and Development

  The Political Economy of Industrialization in Vietnam.

  • Christine Ngoc Ngo(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  Rent Seeking involves social waste. Resources that could otherwise be devoted to value-producing activity are engaged in competitive effort that determines nothing other than the distributive results. Rent Seeking, as such, is totally without allocative value, although, of course, the initial institutional creation of an opportunity for Rent Seeking ensures a net destruction of economic value.

  (Buchanan, 1980a, p. 359)

  Consistent with this perspective is the view of Kevin Murphy, Andrei Shleifer, and Robert Vishny (1993). Here, the authors distinguish between private and public rent-seeking activities and calculate their respective impacts on the economy.10 Private Rent Seeking, equated with “theft, piracy, litigation, and other forms of transfer between private parties,” negatively impacts production, as the target is “existing stocks of wealth” but has little, if any, effect on innovation. Public Rent Seeking, by contrast, is redistributive in nature, redirecting resources “from the private sector to the state” through taxation, or “from the private sector to the government bureaucrats who affect the fortunes of the private sector,” as the state controls access to what becomes in essence “government-supplied goods, such as permits, licenses, import quotas, and so on” (Murphy et al., 1993, p. 412). The authors argue, however, that public Rent Seeking need not have a negative impact on innovation. For instance, if the state and its bureaucracies “can take an equity stake in innovative activities, so that they can effectively accept a bribe without demanding cash, turn innovators into insiders, reduce their own incentives for subsequent expropriation, and bear some of the risk,” they may find it worthwhile to support innovative, entrepreneurial producers (Murphy et al., 1993, p. 413). It is equally plausible that the government would support established monopolies resistant to innovation, which, in turn, may deter

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  Mineral Rents and the Financing of Social Policy

  Opportunities and Challenges

  • Katja Hujo(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Second, individuals and groups that have not benefited from existing systems of rent alloca- tion could be strongly persuaded to obtain shares by forging relations and trust with powerful interest groups. In the words of The Economist (1995) ‘the power centre in any resource-rich country soon notices that the profits from capturing a slice of the rent from natural resources beat those of any possible alternatives’. The upshot is an outbreak of com- petitive Rent Seeking. The lure for Rent Seeking comes from considerable returns to those who are able to capture them, and it often comes at the expense of entrepreneurs. The result is what Mehlum, Moene and Torvik (2006: 3) Samuel G. Asfaha 81 referred to as ‘grabber-friendly’ institutions ‘where Rent Seeking and production are competitive activities’. Grabber-friendly institutions are characterized by ‘weak rule of law, malfunctioning bureaucracy and cor- ruption’. In such institutions, the benefit from unproductive activities outweighs the benefit from entrepreneurial and productive activities. In resource-rich countries such as Mexico, Nigeria and Venezuela, to mention a few egregious examples where competitive Rent Seeking is rampant, political and economic institutions are characterized by fragil- ity and lack of transparency and accountability. Political economy of new international initiatives for management of resources As briefly discussed before, the political dimension of the Dutch dis- ease makes healing it a complex task that can rarely be achieved by using only standard economic tools. The political dimension is the underlying force behind economic policymaking.

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  Political Conflict and Development in East Asia and Latin America

  • Richard Boyd, Galjart Benno, Tak-Wing Ngo, Benno Galjart(Authors)
  • 2007(Publication Date)
  • Routledge

    (Publisher)

  In short this is tricky terrain. However, traverse it we will in the following pages, and our decision to do so merits an explanation. The principal justification is that rents and rent-seeking are implicated one way and another in each of the developmental explanations listed above. “Intervention,” any kind of intervention beyond the indispensable (Douglas Northian) minimum sufficient to establish the rule of law, property rights and the integrity of contracts, is, in one view, immediately constitutive of rents and potentially compromisable by these. In the case of the industrial policy of the developmental state, this is in large part a matter of the strategic and tactical deployment of rents, its success dependent upon a kind of rent-seeking science and a high degree of anticipatory wisdom regarding the rent-seeking proclivities of private sector partners, clients and other interests. By the same token both the “insulation” and the “embeddedness” of the developmental state can be construed in terms of access to rents and controls over rent-seeking. Developmental strategies, both ISI and EOI industrialization, are inordinately vulnerable to rent-seeking and critically dependent upon the state’s ability to get the rent-seeking science right. The bureaucracy is the chief player in all of these accounts and typically is the agency favored with both the design and the implementation of developmental strategies and, simultaneously, both gatekeeper commanding access to rents and, no less, home to a multitude of potentially rent-seeking officials. In short there is hardly an explanation of developmental success and failure that does not subsume some understanding of rents and rent-seeking. At the same time there are few explanations that treat rent-seeking as anything other than an aberration. And there is in that combination of facts a great incongruity and a major obstacle to understanding.

  We seek to go beyond this. Our point of departure is acceptance of the normality of rents and rent-seeking. Our desire is to delay – or better still to postpone – the rush to judgment that attends most efforts to analyze rents and rent-seeking. Our concern is an empirical investigation and characterization of rents and rent-seeking practice in Japan and Mexico that treats these as a normal feature of daily politico-economic life, and attempts to make sense of them from that perspective, rather than as an aberration from or distortion of some normatively derived normal. We will note how they configure the universe of the firm (and so we will have due regard to the economic outcomes of rents and rent-seeking in Japan and Mexico) whilst studiously avoiding all temptation to construe them (by analogy, by functional equivalence, by correspondence and so on), in terms of the thought-to-be prior and higher logic of the market.

  Rents: some definitional and procedural preliminaries

  It has been customary to argue that the creation of market-distorting economic opportunities by political action is detrimental to economic growth. The return on such opportunities over and above what putatively a freely operating market would have returned, the market-clearing price, has been termed a rent.16 It has been widely acknowledged (see above) that the pursuit of such advantage is commonplace in the development process (and elsewhere) – indeed at a microeconomic level rent-seeking is barely distinguishable from profit-seeking.17

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  Rational Choice

  • Andrew Hindmoor, Brad Taylor(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  165 Chapter 7 Gordon Tullock, Rent-Seeking and Government Failure Setting the stage: government without angels As we saw in Chapter 2, government can usefully be seen as a response to the problems caused by individual selfishness. Without laws backed by the coercive power of the state, many would find plunder an attrac-tive career option, and this would ultimately make everybody worse off. But if government is empowered to prevent private predation in the form of theft and murder, we need to beware the possibility of preda-tion by government. James Madison elegantly summarizes the problem in the 51st Federalist paper: If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on gov-ernment would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. Overview : Business firms and interest groups are influential actors in the policy process. In ‘The Welfare Costs of Tariffs, Monopolies and Theft’, Gordon Tullock (1967) argued that the way in which they exer-cise this influence is economically crippling. Rent-seeking takes place when firms or interest groups try to extract special privileges from gov-ernment. Rent-seeking is damaging because it entails the expenditure of resources which might otherwise have been used to benefit consumers. In this chapter we outline Tullock’s original argument and subsequent work by Tullock and others asking why the rent-seeking ‘industry’ of lobbying firms, public relations companies and lawyers so small. We then consider other rational choice models of interest group behaviour and extend the rent-seeking approach to influence within private organ-izations and public bureaucracies.

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  Rents, Rent-Seeking and Economic Development

  Theory and Evidence in Asia

  • Mushtaq H. Khan, Kwame Sundaram Jomo(Authors)
  • 2000(Publication Date)
  • Cambridge University Press

    (Publisher)

  Nevertheless, once particular patterns are recognized, we can ask gen- eral questions, the answers to which may be relevant for other contexts as well. In the next two sections we will look at the variables which can explain differences in the input costs of rent-seeking and the differential rent-outcomes in different contexts. The input cost of rent-seeking Conventional rent-seeking models have concentrated almost exclusively on the rent-seeking cost which is the input cost of rent-seeking. This is the cost to society of resources being used up in rent-seeking activities. These activities include lobbying, bribing, maintaining political factions, and so on, which can potentially absorb a significant share of society's resources. Calculation of the 'rent-seeking cost' involves two steps: first, estimating the magnitude of the rent-seeking expenditure, and, second, estimating the social cost of this expenditure. The early rent-seeking models used a num- ber of simplifying assumptions to show that rent-seeking expenditure was equal to the size of the rent being competed for. If this was true, then for a total rent of $100, the total expenditure on rent-seeking would be exactly $100. For the second step, these models simply asserted that this entire expenditure was a social cost. We begin by looking at the early mod- els. We then see how, with different political and institutional assump- tions, the rent-seeking cost can be much larger or smaller. The rent-seeking expenditure: early rent-seeking models We know that individuals will only spend resources on rent-seeking if their expenditures change the probability of their winning (or not RENT-SEEKING AS PROCESS 105 losing) the rent they are seeking (or which they already possess). How much individuals spend in aggregate will depend on how they perceive their probabilities of winning are likely to change as a result of these expenditures.

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  Getting a Dial Tone

  Telecommunications Liberalisation in Malaysia and the Philippines

  • John Monfries(Author)
  • 2007(Publication Date)
  • ISEAS Publishing

    (Publisher)

  3 For neoliberals, corruption and rent-seeking are costly, welfare- reducing activities that have to be eliminated for the economy to develop. Because rents are created in direct proportion to the state’s involvement in the economy, the goal therefore is to liberalise and create a competitive economy with minimal state involvement. The adoption of market-oriented reforms through privatisation, liberalisation, and deregulation is the core policy advice of the neoliberal perspective encapsulated in the “Washington Consensus”. In the Philippines, where rent-seeking, cronyism, and patronage structures were identified as barriers to economic growth, the 3 Rent Seeking, Market Reforms, and the State government adopted policies to open the market to competition and remove monopoly control over key sectors of the economy after the fall of President Marcos in 1986. Economic policy in the Philippines shifted towards market-oriented reforms in the belief that limited state involvement in the economy would solve the country’s lagging development status. In Malaysia, privatisation and liberalisation policies were also adopted in the mid-1980s as a response to an economic slowdown, burgeoning public sector deficits, and inefficient state enterprises. Ironically, market reforms that aim to remove state intervention create further occasions for rent-seeking because the policy changes are themselves government activities that have potentially large distributional and political consequences. 4 Ha-Joon Chang argues that while the goal of market liberalising reforms is to create a competitive, dynamic economy where the state does not intervene, even competitive markets are bound to create a lot of rents, and people are bound to spend resources to capture them.

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