What Is Rent Seeking?
Rent seeking is defined as any practice in which an entity aims to increase its wealth without making any contribution to the wealth or benefit of society.
It's typically done by manipulating the political environment and can result in social harm. A common example of rent seeking is the act of lobbying for government-funded subsidies.
Key Takeaways
- Rent seeking is an economic concept that occurs when an entity seeks to gain wealth without making any contribution to the benefit of society.
- “Rent” in rent seeking is based on the economic definition of the term, which is defined as economic wealth obtained through shrewd or potentially manipulative use of resources.
- An example of rent seeking is when a company lobbies the government for grants, subsidies, or tariffprotection.
- Rent seeking comes in many forms from lobbying or donating funds.
- For example, if you donate money but write it off on your taxes, it could be considered a form of rent seeking.
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How Does Rent Seeking Work?
The concept of rent seeking was established in 1967 by Gordon Tullock and popularized by Anne Krueger in 1974. It evolved from the studies of Adam Smith, who is often regarded as the father of economics. The concept is based on an economic definition of “rent,” defined as economic wealth obtained through shrewd or potentially manipulative use of resources.
Smith’s studies suggested that entities earn income from wages, profit, and rent. To create profit usually requires the risk ofcapitalwith the goal of gaining a return. Earning wages comes from employment. However, rent is the easiest to obtain of the three income sources and can require little risk.
Economic rent is the income earned from the utilization of resource ownership. Entities that own resources can lend them to earn interest rent, lease them to earn rental income, or utilize them in other income-producing ways.
In general, the term “economic rent” has evolved to mean receiving a payment that exceeds the costs involved in the associated resource. Entities, therefore, will take rent-seeking steps to obtain economic rent that requires no reciprocal contribution of production.
One example of rent seeking is when companies hire lobbyists to encourage the government to change regulations to make it easier for them to earn profits, rather than try to spend time and money on improving their goods in the marketplace.
Rent Seeking Factors and Examples
Rent seeking is a byproduct of political legislation and government funding. Politicians decide the laws, regulations, and funding allocations that govern industries and government subsidy distributions. These legislations and actions manifest rent-seeking behaviors by offering economic rent with little or no reciprocity.
Business Rent Seekers
Business social service programs are typically designed to provide aid for businesses with the goal of fostering economic prosperity.
For example, businesses such as banks can lobby the government for help in the areas of competition, special subsidies, grants, andtariffprotection. If a business succeeds in getting laws passed to limit their competition, bail them out of economic hardship, or createbarriers to entryfor others, it can achieve economic rents without any added productivity or capital at risk.
Licensing Requirements
Lobbying for the lessening of occupational licensing requirements is another very specific example of rent seeking. Doctors, dentists, airline pilots, and many other fields require licensing to practice. However, in many U.S. states, this licensing process is expensive and time-consuming.
Often, regulations exist due to past lobbying efforts from existing industry members. If certification and license obligations prevent newcomers from competing, fewer professionals may share the revenue. Thus, a more significant portion of money accrues to each existing member without additional economic benefit. Also, since limits to competition can be a driver for prices, consumers may be required to pay more.
Issues Arising From Rent Seeking
Rent seeking can disrupt market efficiencies and create pricing disadvantages for market participants. It has been known to cause limited competition and high barriers to entry.
Those that benefit from successful rent seeking obtain added economic rents without any added obligations. This can potentially create unfair advantages, specifically providing wealth to certain businesses that lead to greater market share at the detriment of competitors.
Lastly, rent-seeking wealth is typically a function of taxpayer funding. These tax revenues are used to provide economic wealth for rent seekers but may or may not improve the economic climate or produce any benefits for taxpayers at large. This can lead to disparaging funds that lack regeneration and require higher taxes in the future.
Is Rent Seeking Illegal?
In general, competition for rent is legal, regardless of any harm it may do to an economy. However, various rent-seeking behaviors are illegal, such as the forming of cartels or the bribing of politicians.
Why Is Rent Seeking Bad for the Economy?
Rent seeking can make markets less efficient by creating price disadvantages for consumers or companies. Rent-seeking behavior can also create artificial bars to entry for new companies, stifling innovation.
Are Landlords Rent Seekers?
Not generally. The use of the word “rent” can create some confusion here. The term “rent” in rent seeking is based on the economic definition of “rent,” which is defined as economic wealth obtained through shrewd or potentially manipulative use of resources. That said, it’s possible for landlords to engage in rent-seeking behavior.
The Bottom Line
Rent seeking is an economic concept that occurs when an entity seeks to gain wealth without making any reciprocal contribution of wealth to society. An example of rent seeking is when a company lobbies the government for grants, subsidies, or tariffprotection.
Rent seeking comes in many forms from lobbying or donating funds. For example, if you donate money but write it off on your taxes, it could be considered a form of rent seeking. Rent seeking interferes with the efficient operation of the free market, and it imposes unfair prices and barriers on individuals and companies.
