1974 ThePoliticalEconomyoftheRentSee

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Subject Headings: Rent Seeking.

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Introduction

In many market-oriented economies, government restrictions upon economic activity are pervasive facts of life. These restrictions give rise to rents of a variety of forms, and people often compete for the rents. Sometimes, such competition is perfectly legal. In other instances, rent seeking takes other forms, such as bribery, corruption, smuggling, and black markets.

It is the purpose of this paper to show some of the ways in which rent seeking is competitive, and to develop a simple model of competitive rent seeking for the important case when rents originate from quantitative restrictions upon international trade. In such a case 1) competitive rent seeking leads to the operation of the economy inside its transformation curve; 2) the welfare loss associated with quantitative restrictions is unequivocally greater than the loss from the tariff equivalent of those quantitative restrictions; and 3) competitive rent seeking results in a divergence between the private and social costs of certain activities. Although the analysis is general, the model has particular applicability for developing countries, where government interventions are frequently all-embracing.

A preliminary section of the paper is concerned with the competitive nature of rent seeking and the quantitative importance of rents for two countries, India and Turkey. In the second section, a formal model of rent seeking under quantitative restrictions on trade is developed and the propositions indicated above are established. A final section outlines some other forms of rent seeking and suggests some implications of the analysis.

1. Competitive Rent Seeking

A. Means of Competition

...

III. Conclusions and Implications

In this paper, focus has been on the effects of competition for import licenses under a quantitative restriction of imports. Empirical evidence suggests that the value of rents associated with import licenses can be relatively large, and it has been shown that the welfare cost of quantitative restrictions equals that of their tariff equivalents plus the value of the rents.

While import licenses constitute a large and visible rent resulting from government intervention, the phenomenon of rent seeking is far more general. Fair trade laws result in firms of less-than-optimal size. Minimum wage legislation generates equilibrium levels of unemployment above the optimum with associated deadweight losses, as shown by John Harris and Michael Todaro, and Todaro. Ceilings on interest rates and consequent credit rationing lead to competition for loans and deposits and/or high-cost banking operations. Regulating taxi fares affects the average waiting time for a taxi and the percent of time taxis are idle, but probably not their owners' incomes, unless taxis are also licensed. Capital gains tax treatment results in overbuilding of apartments and uneconomic oil exploration. And so on.

Each of these and other interventions lead people to compete for the rents although the competitors often do not perceive themselves as such. In each case there is a deadweight loss associated with that competition over and above the traditional triangle. In general, prevention of that loss can be achieved only by restricting entry into the activity for which a rent has been created.

That, in turn, has political implications. First, even if they can limit competition for the rents, governments which consider they must impose restrictions are caught on the horns of a dilemma: if they do restrict entry, they are clearly "showing favoritism" to one group in society and are choosing an unequal distribution of income. If, instead, competition for the rents is allowed (or cannot be prevented), income distribution may be less unequal and certainly there will be less appearance of favoring special groups, although the economic costs associated with quantitative restrictions will be higher.

Second, the existence of rent seeking surely affects people's perception of the economic system. If income distribution is viewed as the outcome of a lottery where wealthy individuals are successful (or lucky) rent seekers, whereas the poor are those precluded from or unsuccessful in rent seeking, the market mechanism is bound to be suspect. In the United States, rightly or wrongly, societal consensus has been that high incomes reflect at least to some degree-high social product. As such, the high American per capita income is seen as a result of a relatively free market mechanism and an unequal distribution is tolerated as a by-product. If, instead, it is believed that few businesses would survive without exerting "influence," even if only to bribe government officials to do what they ought in any event to do, it is difficult to associate pecuniary rewards with social product. The perception of the price system as a mechanism rewarding the rich and well-connected may also be important in influencing political decisions about economic policy. If the market mechanism is suspect, the inevitable temptation is to resort to greater and greater intervention, thereby increasing the amount of economic activity devoted to rent seeking. As such, a political "vicious circle" may develop. People perVeive that the market mechanism does not function in a way compatible with socially approved goals because of competitive rent seeking. A political consensus therefore emerges to intervene further in the market, rent seeking increases, and further intervention results. While it is beyond the competence of an economist to evaluate the political impact of rent seeking, the suspicion of the market mechanism so frequently voiced in some developing countries may result from it.

Finally, all market economies have some rent-generating restrictions. One can conceive of a continuum between a system of no restrictions and a perfectly restricted system. With no restrictions, entrepreneurs would seek to achieve windfall gains by adopting new technology, anticipating market shifts correctly, and so on. With perfect restrictions, regulations would be so all-pervasive that rent seeking would be the only route to gain. In such a system, entrepreneurs would devote all their time and resources to capturing windfall rents.

While neither of these extreme types could ever exist, one can perhaps ask whether there might be some point along the continuum beyond which the market fails to perform its allocative function to any satisfactory degree. It will remain for further work to formalize these conjectures and to test their significance. It is hoped, however, that enough has been said to stimulate interest and research on the subject.

References

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 AuthorvolumeDate ValuetitletypejournaltitleUrldoinoteyear
1974 ThePoliticalEconomyoftheRentSeeAnne O KruegerThe Political Economy of the Rent-seeking Society1974
AuthorAnne O Krueger +
titleThe Political Economy of the Rent-seeking Society +
year1974 +