Rent Seeking

A rent can be defined as a payment to the owner of any input that is used in production, such as a building in which a company operates its business, over and above what is necessary to bring forth its supply. Here the building is considered a fixed input because it will not vary in the short run as the value of the company’s business rises and falls. Thus, any payment to the building’s owner beyond its value in its next-​most valuable use (i.e., its opportunity cost) would be considered a rent. Payment for an input that covers the opportunity cost but not more, such as a worker’s wage that compensates only for the value of his lost leisure time, is therefore not rent (e.g., a person’s superior in-​born skills or the superior location of a parcel of land that can earn its owner surpluses over cost). Thus, rent is often associated with factors that are relatively fixed in supply.

In addition to being a regular feature of unhampered markets, however, rents also can be created through acts of government intervention that block free access to markets, limit the availability of inputs, or restrict the supplies of various products. It can do this, for example, by requiring official approval. Because such restrictions can create valuable rents, they also give agents an incentive to spend scarce resources—such as time, labor, and capital—in order to acquire the favor or other inputs needed to capture them.

This phenomenon is called rent seeking, a term coined by Anne Krueger in 1974. It has become a highly useful analytical tool in the study of interventionism as practiced by the so-​called public choice school of political economy. For example, if a government-​created rent is worth $500,000 to a single agent, he would be willing to spend up to $500,000 worth of resources on the essential input (such as a grant of special privilege) in order to capture it. Competition by multiple agents also will tend to raise the cost of the input, and, under certain assumptions (i.e., risk neutrality and perfect knowledge), the total value of the resources they expend will exactly equal the value of the rent.

Normatively, these resources represent a pure waste from the viewpoint of economic efficiency because the output of such an investment has no economic value. There is, for example, no net value added by artificially limiting the supply of taxis or from lobbying for a tariff against foreign imports. Whoever gains rents this way may be better off, but others, consumers as well as potential competitors who could provide the service more cheaply, will be made decidedly worse off. The result is typically higher prices, poorer quality, or fewer choices owing to the effectiveness of political means in discouraging potential rival entrepreneurs. In a more dynamic context, rent seeking also can stifle the competitive discovery process so that, over time, consumers will be less likely to become aware of more efficiently produced goods, and producers will be less likely to provide them.

It is important to note, however, that whether an action is rent seeking has less to do with an agent’s motive than with what actions the existing social institutions or rules effectively constrain or permit. If these rules limit agents to voluntary exchanges, which can provide a good or service that others would be willing to pay more for than the cost of the resources used to produce it, then doing so will increase wealth. Rents generated in this way have a positive value insofar as creating wealth is considered desirable. Thus, acquiring rents on land or other assets through voluntary exchange is not rent seeking, but profit seeking, in which entrepreneurs transfer resources from where they are valued less to where they are valued more.

In contrast, if the rules permit the use of the government’s authority to initiate aggression (i.e., “political means”) to contrive rents by preventing competition or forcibly redistributing wealth, then agents have an incentive to spend valuable resources in attempting to gain access to such means. Rent seeking is therefore the rational response of agents operating under interventionism.

Another aspect of rent seeking concerns the possible effect on social norms inasmuch as rent seeking tends to encourage growing numbers of ordinary people to engage in it as they attempt to acquire political power for themselves, either to gain special privileges or to redress the mounting privileges of others. It can thereby set into motion a dynamic that progressively erodes respect for limited government, private property, and the rule of law. In particular, according to F. A. Hayek, the rule of law is supposed to bind government by rules that are fixed and announced beforehand and that are not intended to benefit or harm any particular person or group. For example, a rule that forbids anyone from engaging in fraudulent advertising is in accord with the rule of law, whereas a rule that grants a monopoly privilege to a particular agent is not. The rule of law serves to protect individuals against arbitrary government interventions, and, with private property and limited government, it is one of the pillars of personal liberty and the free market.

Rules and institutions that beget rent seeking are clear violations of the rule of law because, by their nature, they privilege some at the expense of others. This privilege, in turn, gives agents an incentive to spend resources either to associate themselves with the winners or distance themselves from the losers. The desire to capture politically generated rents is a fundamental motive for interventionist breaches of the rule of law. At the same time, rent seeking tends to prevail to the extent that violations of the rule of law are tolerated. A politico-​economic system that strictly observes the rule of law would necessarily serve to severely constrain rent seeking.