Rent-seeking - Possible Consequences

Possible Consequences

From a theoretical standpoint, the moral hazard of rent-seeking can be considerable. If "buying" a favorable regulatory environment is cheaper than building more efficient production, a firm may choose the former option, reaping incomes entirely unrelated to any contribution to total wealth or well-being. This results in a sub-optimal allocation of resources — money spent on lobbyists and counter-lobbyists rather than on research and development, improved business practices, employee training, or additional capital goods — which retards economic growth. Claims that a firm is rent-seeking therefore often accompany allegations of government corruption, or the undue influence of special interests.

Rent-seeking may be initiated by government agents, such agents soliciting bribes or other favors from the individuals or firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer. It has been shown that rent-seeking by bureaucracy can push up the cost of production of public goods. It has also been shown that rent-seeking by tax officials may cause loss in revenue to the public exchequer.

Mancur Olson traced the historic consequences of rent seeking in The Rise and Decline of Nations. As a country becomes increasingly dominated by organized interest groups, it loses economic vitality and falls into decline. Olson argued that countries that have a collapse of the political regime and the interest groups that have coalesced around it can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. An example of this is Japan after World War Two. But new coalitions form over time, once again shackling society in order to redistribute wealth and income to themselves. However, social and technological changes have allowed new enterprises and groups to emerge in the past.

Rent-seeking behavior, in terms of land rent, figures in Georgist economic theory, where the value of land is largely attributed to provision of government services and infrastructure (e.g., road building, provision of public schools, maintenance of peace and order, etc.) and the community in general, rather than resulting from any action or contribution by the landowner.

A study by Laband and John Sophocleus in 1988 estimated that rent-seeking had decreased total income in the USA by 45 percent. Ultimately, it is difficult to truly know the cost of rent-seeking, affirmed by both Dougan and Tullock. Rent-seekers of government provided benefits will in turn spend up to that amount of benefit in order to gain those benefits. Similarly, taxpayers lobby for loopholes and will spend the value of those loopholes, again, to obtain those loopholes. The total of wastes from rent-seeking is the total amount from the government provided benefits and instances of tax avoidance. Dougan says that the “total rent-seeking costs equal the sum of aggregate current income plus the net deficit of the public sector."

Mark Gradstein writes about rent-seeking in relation to public goods provision, and says that public goods are determined by rent seeking or lobbying activities. But the question is whether private provision with free-riding incentives or public provision with rent-seeking incentives is more inefficient in its allocation.

Rent-seeking can also be quite costly to economic growth. This is due to the fact that high rent-seeking activity makes more rent-seeking attractive because of the natural and growing returns that one sees as a result of rent-seeking. Thus, rent-seeking is valued over productivity. In this case there are very high levels of rent-seeking with very low levels of output. Another reason rent-seeking may grow at the cost of economic growth is that public rent-seeking by the state can so easily hurt innovation. Ultimately, public rent-seeking hurts the economy the most because innovation is what drives economic growth.

The economist Joseph Stiglitz has argued that rent-seeking is a large component of the causes of American income inequality through lobbying for Government policies that let the wealthy and powerful get income not as a reward for creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort.