The point about contestability is also taken up in a sequence of studies of misallocation of talent and corruption, although the connection to the rent-seeking literature is not always made explicit.
The general idea in this literature is that talented people can be employed as private sector entrepreneurs or in some other productive job or as government bureaucrats. Positions in the public sector offer corruption possibilities and government officials can benefit personally from the rents they control created by, for example, collusion allowed by asymmetric information as in the example above.
Controlling these rents is a contestable prize and agents will seek employment in the government sector to gain access to them. If the most talented people seek these jobs, there will be misallocation of talent: individuals who should have become productive entrepreneurs become rent seekers in the sense of pure rent seeking instead.
The social costs of rent seeking is, then, the economic consequences of this misallocation of talent, which could be lower growth or income, plus, of course, the policy distortion created by bribery in the first place. Murphy et al. However, government jobs offer the possibility to create and extract rents to the personal benefit of the holder of the job which is their definition of corruption. The analysis emphasizes that talent is often general and talented individuals can be successful in many different jobs, including in jobs that offer pure corruption possibilities and in entrepreneurial jobs.
More able people may be able to extract more rents, and if this advantage is sufficiently large, the most talented will seek jobs in the public sector because those jobs offer corruption opportunities.
The social cost is too little innovation and lower economic growth [see also Murphy et al. The underlying premise of this analysis is that more able people are good at both rent seeking and productive activities. This appears plausible: many lobbyists are very clever, and could have put their talent to productive use in the biotech or some other frontier industry rather than use their abilities in the lobbying industry.
However, this is not the only reason why corruption opportunities in the public sector can lead to misallocation of talent. Acemoglu and Verdier , point to another more subtle mechanism. In their analysis, the government bureaucracy has a socially valuable purpose, namely to enforce contracts that support productive investment. This, however, creates corruption possibilities since individual bureaucrats may decide not to enforce a contract in return for a payment from the party that benefits.
Anticipating this makes investment unprofitable ex ante and too little or no investment will be undertaken. The benevolent government may try to solve this problem by paying efficiency wages. This, however, generates a social cost because it attracts individuals to the public sector with no comparative advantage in that sector. The rent-seeking cost is indirect in this model: it is not so much the fact that government jobs offer corruption possibilities that is the source of the problem.
While the corruption literature, leaving the exceptions noted above aside, could learn from the rent-seeking literature, it is not a one-way street. The rent-seeking literature can also learn from the corruption literature, or, at least, part of it. They do so by introducing artificial scarcity via licenses, permissions, cumbersome procedures, etc. It is plain that the incentive of a public official to create artificial scarcity depends critically on whether he or she can subsequently benefit from the rent thus created.
Government officials have little incentive to create rents if they cannot benefit from them Hillman Bribery allows officials the maximum flexibility in capturing the rent they have created. As emphasized by Lambsdorff , this makes corruption, understood as influence-seeking activities from which officials personally benefit, particularly harmful to society: corruption possibilities encourage rent creation.
If, instead, rent creation triggers influence-seeking activities which do not directly benefit the official and may even be costly to him or her because it involves costly engagement with lobbyists and special interests, then the incentive to create the rent in the first place is decreased.
In short, corruption encourages rent creation because it allows the creator of the rent to benefit personally.
To quote Tullock , p. An implication, then, is that bribery is particularly harmful from a social point of view. It underlies the incentive for officials to create rents.
This is socially harmful in itself because it involves creating artificial scarcity and this creates deadweight losses. On top of that, bribery and corruption more broadly maximise the risk of triggering costly contests related to obtaining the positions in government that enable the bribes to be collected. While the consequences of the symbiotic relationship between rent creation and corruption has yet to be fully explored in the rent-seeking literature in general, the literature on contest design, initiated by Gradstein and Konrad and explored in Mealem and Nitzan amongst others, provides the foundation for a bridge between the two literatures.
A promising research programme would be to explore more deeply the interplay between corruption, rent creation and contest design. The past 30 years have seen a massive empirical research effort aimed at understanding the causes and consequences of pure corruption see, e. This research agenda has been fuelled by cross country data on corruption perceptions and more recently by individual or firm level survey data on experienced corruption.
These types of data have attracted a fair amount of critique and rightly so. Footnote 7 Yet, the empirical corruption literature clearly points to substantial economic costs of corruption. Mauro , for example, finds a small negative growth effect and a large negative effect of corruption on investment. Subsequent research has shown that the growth effect interacts with the underlying quality of institutions Aidt et al.
Other studies have shown that corruption increases inequality Gupta et al. Expenditure tracking studies undertaken in many countries have demonstrated how vast amounts of public resources intended for schools and other public spending programmes simply disappear and never reach the intended beneficiaries Reinikka and Svensson Unlike the study of corruption, empirical research on rent seeking can hardly be said to be booming.
Footnote 8 The existing research efforts have partly been guided by the invertability hypothesis and partly by attempts to measure rent seeking costs directly. Krueger , Posner and Cowling and Mueller pioneered the indirect method based on the invertability hypothesis. These studies and others like them assume full rent dissipation. The theoretical literature on rent seeking contests shows that this assumption is only valid in special cases and that the degree of dissipation depends on the contest function, on risk preferences, on the nature of the prize being sought, and on many other features.
Employing the full dissipation assumption is, therefore, likely to inflate the cost estimates. Lopez and Pagoulatos is a rare example of a study that estimates the degree of rent dissipation. Hazlett and Michaels also estimate dissipation ratios.
They explore a natural experience induced by a cellular telephone licence lottery in the s in the USA and find that the ratio was An alternative approach is to estimate the social cost of rent seeking simply by adding observable expenditures on rent seeking related activities up.
A typical finding is that the actual money spent on lobbying in the USA is low relative to the value of the rents at stake—an observation Tullock himself made when he rhetorically asked why the total amount of resources going into politics appear to be small relative to the value of the prizes that can potentially be won.
Footnote 9 Others have gone further than counting lobbying expenses and added more expenditures to the rent seeking bill e. The estimates emerging from this type of research vary a lot in size, from 0. The fundamental problem with this approach clearly is that it requires an up-front judgement about what constitutes rent seeking costs, and doing that objectively is hard, if not impossible.
The empirical rent-seeking literature suggests that rent dissipation is incomplete, and that the total rent seeking cost, therefore, could be a lot smaller than the value of the rents. In contrast, the empirical corruption literature points to substantial welfare costs of corruption and strongly suggests that corruption is a major obstacle to economic development.
Of course, one could take the view that corruption costs in practise are correlated with rent seeking costs. However, doing so would diverge attention away from the very important task of quantifying the true cost of rent seeking. One way out of this conundrum is to base empirical research on rent seeking more firmly on rent seeking theory and to build structural models that can be matched to observable data on policy outcomes, campaign contributions, employment in the lobbying industry, etc.
It is surprising that the corruption and rent-seeking literatures have not crisscrossed more than it appears to have been the case. After all, they are both concerned with what I have called influence-seeking activities and there is clearly scope for fruitful cross fertilization.
The consequences of this are two-fold. First, the literature underestimates the value of corruption-control policies. The overriding objective of the law and economics and organisational economics literature on corruption is precisely to devise and evaluate such policies.
A fruitful research project would be integrate the notion of contestable rents and the associated rent-seeking cost into the principal-agent models of corruption and to reconsider existing results about socially optimal levels of corruption. Second, the literature underestimates the social cost of corruption.
Insofar as corruption is conceptualized as a costless transfer of income from one party to another, it may appear that corruption is a social problem only because it leads to policy distortions and because it leads to inequitable and unfair allocations of public resources and funds.
The rent-seeking literature would insist adding Tullock rectangles on the debit side. We just need to quantify them. The rent-seeking literature has been surveyed by Nitzan , Tollison , Congleton et al. The papers in Congleton and Hillman summarize the different dimensions of the rent-seeking literature.
See, e. Williams contains a collection of social science articles that dwell more deeply into the definitional issues. Aidt lists two additional categories, called efficient corruption and self-reinforcing corruption. For the purpose of evaluating the influence of the rent-seeking literature on the corruption literature, it is, however, sufficient to zoom in on the two main categories listed in the text.
For other classifications, see Tanzi , Rose-Ackerman or Jain Krueger , pp. Hillman and Ursprung describe nested contests in which outsiders compete to be insiders who compete directly for rents.
Political culture determines the openness of the contests to outsiders. See the critical discussion in Kaufmann et al. Del Rosal offers a critical survey of the empirical rent-seeking literature. Mixon , for example, finds that interest group contributions related to obtaining social security funds in the USA amount to only 0.
Goldberg and Maggi estimate the weight given to social welfare relative to special interest groups in the setting of US trade policy. Their results suggest that the influence of special interests is very small, which, again, suggests that the welfare cost of rent seeking is of limited importance. Hillman and Ursprung discuss reasons why there appear to be less rent seeking and less rent dissipation than might be expected. Acemoglu, D.
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Policy compromises: Corruption and regulation in a democracy. Economics and Politics, 20 3 , — Governance regimes, corruption and growth: Theory and evidence. Journal of Comparative Economics, 36 2 , — Enduring rents. European Journal of Political Economy, , — Becker, G. Law enforcement, malfeasance and the compensation of enforcers. Journal of Legal Studies, 3 , 1— Bliss, C.
Does competition kill corruption? Journal of Political Economy, , — Buchanan, J. Rent seeking and profit seeking. Buchanan, R. Tullock Eds. Reprinted in R. Congleton, A. Konrad Eds. Heidelberg: Springer. Charap, J. Institutionalized corruption and the Kleptocratic state. Gupta Eds. Washington, D. Congleton, R. Companion to the political economy of rent seeking. Forty years of research on rent seeking: An overview. Cowling, K. The social costs of monopoly power.
Economic Journal , 88, — Dabla-Norris, E. A game theoretical analysis of corruption in bureaucracies. Del Rosal, I. The empirical measurement of rent-seeking costs. Journal of Economic Surveys, 25 2 , — Dhami, S. Corruption and the provision of public output in a hierarchical asymmetric information relationship.
Journal of Public Economic Theory, 9 4 , — Dimakou, O. Bureaucratic corruption and the dynamic interaction between monetary and fiscal policy. Epstein, G. Contestable policies. Hillman Eds.
Goldberg, P. Protection for sale: An empirical investigation. American Economic Review, 89 5 , — Gradstein, M. Orchestrating rent seeking contests.
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Develop and improve products. List of Partners vendors. 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.
The concept of rent seeking was established in by Gordon Tullock and later popularized by Anne Krueger in 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 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. 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 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. 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. 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. 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. Wealth Management.
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