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Rent Seeking

Updated on January 31, 2024
Article byKosha Mehta
Reviewed byDheeraj Vaidya, CFA, FRM

Meaning Of Rent Seeking

Rent-seeking refers to the behavior when a person or a firm attempts to enhance their income without reciprocating advantages to the community. Economists use the term “rents” to refer to the returns generated by resources which are higher than the yields they might generate from their next best chance.

Rent seeking

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The pursuit of profits can create social benefits through the marketplace mechanism. However, Rent-seeking leads to societal losses since limited resources are put toward pursuing wealth transfers rather than creating new wealth.

Key Takeaways

  • In economics and public-choice theory, “rent-seeking” refers to raising one’s share of existing wealth without earning or creating any extra wealth.
  • Gordon Tullock was the one who first proposed the idea of rent-seeking in the year 1967.
  • It is a strategy for a game with no winner; the only winner is the rent-seeker because everyone else loses.
  • Rent-seeking may be shown by firms lobbying the government for financial assistance through grants, subsidies, or tariff protection.

Rent Seeking In Economics Explained

Rent-seeking is used in political economy, whereas in economics, the pursuit of profits is known as “profit-seeking. It implies that a person or a firm attempts to enhance their income without contributing advantages or wealth to society.

The word was first utilized, in modern political economy, by the economist Gordon Tullock. Examples of such behavior encompass all of the varying strategies by which people or organizations influence the government for taxing, spending, and legal regulations that bestow monetary advantages or other special upsides upon them at the cost of the tax-paying citizens or consumers or of other groups or individuals with whom the beneficiaries may be in economic competition.

Rent seeking behavior activities are aimed at obtaining monetary advantages and gains using manipulation of the allocation of economic resources. These kinds of behaviors are harming both the economy and society economists. This approach lowers efficiency by ineffectively allocating resources, stopping economic growth. Additionally, it results in other negative outcomes, such as an increase in income disparity, lost government income, and a reduction in the amount of competition that exists.

It is a result of political laws and government financing. Politicians make the decisions about the rules, regulations, and budgets that regulate various firms and the distribution of government subsidies. These acts show seeking tendencies by delivering economic rent with little or no reciprocity.

It is a concept that also includes corrupt behavior by public officials. No nation is devoid of political malpractice, even though it is more seen in certain countries than others. Such a practice can also be committed by public workers who, for example, work in the tax office and ask for and accept bribes in exchange for making special arrangements with persons or firms or who promise to look the other way.

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Examples

Let us look at rent seeking examples to understand the concept better.

Example#1

Imagine that a business CEO is successfully lobbying the government for regulations or subsidies restricting the competitive market and making it much harder for new firms to enter the market. As a result, an increase in current overall assets in that industry without trying to make that industry bigger; is an example of seeking behavior on the owner’s part.

Example#2

A recent article by Forbes highlights how former Philippine President Benigno Aquino III made simple actions such as making fundamental government services available online. These immediately cut away a large number of rent-seeking intermediaries from the process. Before Aquino’s entry into the presidential palace, both of his predecessors were involved in bribery and corruption scandals.

Why Is Rent Seeking Bad For The Economy?

Rent seeking activities don’t add any national value. It is a deal based on coercion and only one side benefits. Acts such as piracy, lobbying the government, or even just distributing funds can all be considered forms of rent-seeking.

It is never productive and never should be done. On the contrary, strong property rights allow for the maximum creation of valuable products and services, which can only be achieved when very little time and energy are wasted on attempts to appropriate the excess of others or to stop others from taking surplus.

Because there are more rewards for output when the economy is doing well, there are fewer incentives for people to seek when the economy is doing well. However, seeking somebody else’s gain seems enticing when current financial conditions make it tough to create.

Because its benefits are frequently consistent, this situation can start a downward cycle since the surpluses accessible vary. In addition, the weight of such seeking expenses on producers further reduces surpluses when a weak economy. This makes it significantly more desirable to seek, which, in turn, places pressure on those attempting to remain productive.

Redistributing the excess of a set of economic classes to other groups of the same class through the régime is a significant portion of the seeking activity. There is no value addition for society as a whole, even if there may be significant financial incentives for one group to seek out the surplus of another group.

Frequently Asked Questions (FAQs)

What is rent-seeking?

It is referred to as rent-seeking when a company uses its assets to get an unjustifiable financial advantage from outside forces, whether that gain is obtained directly or indirectly. The company does not provide anything in return to the outside forces or society.

Rent seeking occurs when?

Rent-seeking is when someone tries to get a favor or money from the government by manipulating the political system. Rent-seeking is a kind of political corruption. In it, an organization attempts to increase its wealth while making no further contribution to the enterprise’s overall productivity. In most cases, it is focused on social service programs and services that the government supports.

What is an example of rent-seeking?

Lobbyists are frequently the most central element in gaining such benefits; as a result, they spend resources to win government subsidies rather than putting those resources to more fruitful use.

This has been a guide to Rent Seeking and its meaning. Here, we explain the concept, examples, and whether it is bad for the economy. You may also find some useful articles here:

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