Rent-seeking

Rent-seeking is the act of growing one's existing wealth by manipulating public policy or economic conditions without creating new wealth. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic efficiency through misallocation of resources, stifled competition, reduced wealth creation, lost government revenue, heightened income inequality, heightened debt levels, risk of growing corruption and cronyism, decreased public trust in institutions, and potential national decline.

Successful capture of regulatory agencies (if any) to gain a coercive monopoly can result in advantages for rent-seekers in a market while imposing disadvantages on their uncorrupt competitors. This is one of many possible forms of rent-seeking behavior.

The term "rent", in the narrow sense of land rent, was coined by the British 19th-century economist David Ricardo, but rent-seeking only became the subject of durable interest among economists and political scientists more than a century later after the publication of two influential papers on the topic by Gordon Tullock in 1967, and Anne Krueger in 1974. The word "rent" in the context of "rent-seeking" does not refer specifically to payment on a lease but rather to Adam Smith's division of incomes into profit, wage, and economic rent. The origin of the term refers to gaining control of land or other natural resources.

Georgist economic theory describes rent-seeking in terms of land rent, where the value of land largely comes from the natural resources native to the land, as well as from collectively paid-for services, such as state schools, law enforcement, fire prevention, and mitigation services. Rent seeking, according to the Georgist, does not include those persons who have invested substantial capital improvements in a piece of land, but rather those who perform their role as mere titleholders.

Rent-seeking is distinguished in theory from profit-seeking, in which entities seek to extract value by engaging in mutually beneficial transactions. Profit-seeking in this sense is the creation of wealth, while rent-seeking is "profiteering" by using social institutions, such as but not limited to the power of the state, to redistribute wealth among different groups without creating new wealth. In a practical context, income obtained through rent-seeking may contribute to profits in the standard, accounting sense of the word.

"Rent-seeking" is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. Rent-seeking implies the extraction of uncompensated value from others without making any contribution to productivity. Because the nature of rent-seeking implies a fixed cost payment, only wealthy participants engage in these activities as a means of protecting their wealth from expropriation.

The Tullock paradox is the apparent paradox, described by economist Gordon Tullock, on the low costs of rent-seeking relative to the gains from rent-seeking.

The paradox is that rent-seekers wanting political favors can bribe politicians at a cost much lower than the value of the favor to the rent-seeker. For instance, a rent seeker who hopes to gain a billion dollars from a particular political policy may need to bribe politicians with merely ten million dollars, which is about 1% of the gain to the rent seeker. Luigi Zingales frames it by asking, "Why is there so little money in politics?" because a naïve model of political bribery and/or campaign spending should result in beneficiaries of government subsidies being willing to spend an amount approaching the value of the profits derived from the subsidies themselves, when in fact only a small fraction of that is spent.