Rent Seeking

What Is Rent Seeking?

Rent seeking (or rent-seeking) is an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs.

Understanding Rent Seeking

The concept of rent seeking was established in 1967 by Gordon Tullock and later popularized by Anne Krueger in 1974. It evolved from the studies of Adam Smith, who is often regarded as the father of economics, and 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 of capital with the goal of gaining a return. Earning wages comes from employment. However, of the three income sources, rent is the easiest to obtain 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 rents, lease them to earn rental income, or they may utilize their resources 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. Oftentimes, this can mean using a particular status to gain economic rent from the government through social service grants.

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.

Governments have established funding for a variety of social service programs. Business social service programs are typically designed to provide aid for businesses with the goal of fostering economic prosperity. Individual social service funding is provided for the goals of wellness and human welfare.

Business Rent Seekers

Businesses can lobby the government for help in the areas of competition, special subsidies, grants, and tariff protection. If a business succeeds in getting laws passed to limit their competition or create barriers to entry for others, it can achieve economic rents without any added productivity or capital at risk.

Individual Rent Seekers

Individual rent seekers are also able to achieve economic rents when obtaining social service funding. Funds are offered through welfare programs, housing assistance, and Medicaid. Individual rent seekers can use their eligibility status for these programs to obtain funds from the government without any reciprocal contribution.

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 leads 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.