Rent-seeking usually produces major social problems, including reduced economic output. The pioneering work of economists has shown that the creation of economic rents leads to a waste of resources potentially more serious than the waste associated with the rent itself. Groups fighting for price invest time and money in transferring wealth, not creating wealth. Regulatory capture is a related term for collusion between companies and government regulatory agencies, which is seen as enabling comprehensive rent-seeking behavior, especially when the government agency must rely on companies to gain market knowledge. Studies on rent-seeking focus on efforts to seize special monopoly privileges such as manipulating state regulation of free corporate competition. [14] The term rent-seeking monopoly privilege is a term frequently used to refer to this particular type of rent-seeking. Frequently cited examples are lobbying for economic regulations such as tariff protection, quotas, subsidies[15] or the expansion of copyright law. [16] Anne Krueger concludes that “empirical evidence suggests that the value of rents associated with import licensing may be relatively high, and it has been shown that the welfare costs of quantitative restrictions are equal to those of their tariff equivalents plus the value of rents.” [3] The paradox is that annuity claimants who want political favours can bribe politicians at a price far below the value of the favour to the annuity applicant. For example, an annuity applicant hoping to earn a billion dollars from a particular political policy only has to bribe politicians to the tune of ten million dollars, which is about 1% of the profit for the annuity applicant. Luigi Zingales puts it by asking, “Why is there so little money in politics?” because a naïve model of political corruption and/or campaign spending should ensure that recipients of public subsidies are willing to spend an amount equal to the value of the grants themselves, when in fact only a small fraction of them are spent.
The concept of rental search was introduced by Gordon Tullock in 1967 and popularized by Anne Krueger in 1974. He evolved from the studies of Adam Smith and is often considered the father of economics. The concept is based on an economic definition of “rent”, defined as the economic wealth obtained through judicious or potentially manipulative use of resources. Rent-seeking never increases productivity. The production of valuable goods and services is maximized with strong property rights when little is wasted seizing the surplus of others or preventing others from seizing our surplus. It is also widely accepted that rent-seeking activities discourage innovation. Instead of developing new and innovative methods to generate income, companies can rely on practice to grow their own wealth. Unfortunately, when property rights are weakened and ownership of someone`s wealth or property is challenged, people can earn more by trying to appropriate that wealth than by producing themselves.
This behavior is called rent-seeking. Attempts by regulators to co-opt for a coercive monopoly can result in advantages for the tenant claimant in a market, while putting their incorruptible competitors at a disadvantage. This is one of many possible forms of rent-seeking behavior. Rent-seeking is theoretically different from profit-seeking, where companies attempt to create value through mutually beneficial transactions. [5] The pursuit of profit in this sense is the creation of wealth, while the search for rent is a “profiteer” by using social institutions such as the power of the state to redistribute wealth among different groups without creating new wealth. [6] In a practical context, income generated by rent-seeking can contribute to profits in the usual accounting sense of the term. Krueger (1974) independently discovered the idea in his study of poor economies whose governments heavily regulated the economic life of their citizens. She pointed out that the regulations are so broad that the government has the power to create “annuities” equal to a high percentage of national income. For India in 1964, for example, Krueger estimated that government regulation created annuities equal to 7.3% of national income; for Turkey in 1968, it estimated that rents from import licences alone amounted to about 15% of Turkey`s gross national product. Krueger tried not to estimate what percentage of these rents were wasted trying to get them. Tullock (1993) tentatively argued that rent-seeking expenses are not very high in democracies. The term rent-seeking was coined by 19th century British economist David Ricardo.
It was not until more than a century later, after the publication of two influential articles on the subject by Gordon Tullock in 1967[2] and Anne Krueger[3] in 1976, that it became the object of lasting interest among economists and political scientists. The word “rent” does not refer specifically to the payment of a lease, but to the division of Adam Smith`s income into profit, wages, and rent. The origin of the term refers to the takeover of land or other natural resources. Rent-seeking can disrupt market efficiency and create price disadvantages for market participants. It is known to cause limited competition and high barriers to entry. The concept of rent-seeking would also apply to the corruption of bureaucrats who solicit and oust “bribes” or “rents” to use their legal but discretionary powers to grant legitimate or illegitimate benefits to clients. [13] For example, tax officials may accept bribes to reduce the tax burden on taxpayers. Analyses of the causes of rent-seeking have traditionally ranked policy decisions according to their relative costs and benefits to the winners (the actors who win or benefit from the prize) and the losers (the actors who finance the prize). Governments are more likely to create political prices and induce rent-seeking when those prices include (1) large benefits for a small, well-organized interest group and (2) low costs for a large number of consumers or taxpayers in the unorganized public. In such a case, for any consumer or taxpayer, the cost of organizing an interest group to eliminate the price would outweigh the benefits of removing the price. Conversely, prize creation is less likely if potential losers are well organized and face high individual costs, while potential winners are not organized and have to share largely in the benefits of the prize.
But why do economists use the term “rent”? Unfortunately, there is no good reason. David Ricardo introduced the term “rent” to businesses. It is a payment to a factor of production beyond what is necessary to obtain that factor in its current use. For example, if I get $150,000 in my current job, but for more than $130,000 I stay in that job, I will earn $20,000 in rent. What`s wrong with finding a rental? Absolutely nothing. I would charge rent if I asked for a raise. My employer would then be free to decide if my services are worthwhile. Even if I look for rents by asking for a raise, that`s not what economists mean by “rent-seeking.” They use this term to describe how people lobby the government to grant them special privileges. A much better term is “seeking privilege.” Georgian economic theory describes rent-seeking in terms of land rent, in which the value of land comes largely from the infrastructure and services of the state (roads, public schools, maintenance of peace and order, etc.) and the community at large, rather than from the actions of a particular landowner in his or her role as a mere titleholder.
This role must be separated from the role of a real estate developer, who does not necessarily have to be the same person. He returned to the hotel and escaped a gossip-seeking landlady and went to her room. Rent-seeking is an attempt to obtain economic rent (i.e. the portion of income paid to a factor of production beyond what is necessary to maintain it in its current use) by manipulating the social or political environment in which economic activities take place rather than creating new wealth. Rent-seeking involves extracting uncompensated value from others without contributing to productivity. The classic example of rent-seeking, according to Robert Shiller, is that of a feudal lord who installs a chain on a river that runs through his land, then hires a collector to charge fees to passing boats to lower the chain. There is nothing productive in the chain or collector. The Lord has not made any improvements to the flow and adds no value, directly or indirectly, except for Himself. All it does is find a way to make money with something that was previously free. [4] The phenomenon of rent-seeking in connection with monopolies was first officially identified by Gordon Tullock in 1967.
[19] In many market-oriented economies, much of the competition for rents is legal, regardless of the damage it may cause to an economy. However, some of the competition for pensions is illegal – such as bribery or corruption. Lobbying for the reduction of the conditions for professional admission is another very concrete example of the search for rent. Doctors, dentists, airline pilots and many other fields need a license to practice. However, in many U.S. states, this licensing process is expensive and time-consuming. An example of rent research is when a company hires lobbyists to encourage the government to change regulations to make it easier for it to make a profit, rather than trying to spend time and money improving its products in the marketplace.