Rent Seeking

Rent seeking is the competition for politically protected transfers of wealth. The typical rent-seeking scenario includes a “prize” and a set of actors that create, capture, and finance the prize. The government creates the prize by setting, for example, a public subsidy, an import license, or a monopoly protected by legal entry barriers. Interest groups struggle to influence the government and capture the prize, a contest that may include lobbying, public-relations campaigns, and bribery. Unorganized segments of the public complete the rent-seeking picture, for they are the actors from whom resources are extracted to finance the prize, via taxes or higher, monopolistic prices.

Research has focused both on the consequences and the causes of rent seeking. Major social problems are commonly seen as a consequence of rent seeking, especially decreased economic output. Pioneering work by economists has shown that the political creation of economic rents, in inducing interests groups to fight for political influence, causes a dissipation of resources that is potentially more serious than the waste associated with the rent itself: Groups struggling for the prize invest time and money in the transfer of wealth rather than in the creation of wealth.

The policy implications of this research are clear. Reallocating resources from rent seeking to productive activities should result in a greater economic output, which in turn is a necessary condition for a “Pareto-superior” outcome: The benefits from the larger pie can be split between the parties so that at least one member of society is better off and no one is harmed. This line of analysis provides a theoretical justification for promarket reforms, such as those implemented in many rich and poor countries in the 1980s and 1990s. However, promarket reforms in Eastern Europe and Latin America have shown that the process of privatization and trade liberalization can generate an avalanche of rent-seeking activities among formerly protected groups rushing to control the positions abandoned by the state.

Analyses of the causes of rent seeking have traditionally classified political decisions based on their relative costs and benefits for winners and losers. Governments are more likely to create political prizes and induce rent seeking when such prizes involve (a) large benefits for a small, well-organized interest group and (b) small costs for a large number of consumers or taxpayers in the unorganized public. In such a case, the costs to each consumer or taxpayer of gathering the relevant information and organizing other individuals in the same situation into a comparable interest group outweigh the benefits of dismantling the prize. Conversely, the creation of prizes is less likely when potential losers are well-organized and must bear a high individual cost, while potential winners lack organization and must broadly share the benefits of the prize. Because the creation of prizes depends on the political configuration of winners and losers, levels of rent seeking correspondingly vary across policy realms and countries. Another argument about the causes of [Page 823]rent seeking conceptualizes it as a low-quality trap in a multioutcome coordination game. A further insight is that the decision to establish the political prize—not just the competition for it—is a rent-seeking activity, thus including politicians as rent seekers.

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