Informal Institutions as Inhibitors of Rent-Seeking Entrepreneurship: Evidence from U.S. History

Abstract

Rent-seeking entrepreneurship occurs whenever entrepreneurs use the political process to extract economic gains without returning commensurate benefits to society (Baumol 1990; Sobel, 2008; Choi and Storr, 2019). While we know that nations with “inclusive” political institutions such as democracy (Acemoglu and Robinson, 2019) have significantly less rent-seeking entrepreneurship than do other nations, rentseeking entrepreneurship remains widespread even in long-established democracies. We therefore need to know more about institutional arrangements that can discourage rent-seeking entrepreneurs in democratic countries. The core research question informing this paper is, therefore: how do changes in norms, beliefs, and similar informal institutions moderate the effectiveness of formal institutions that discourage rent-seeking entrepreneurship? To help answer this question, we draw on historical data from the experience of the United States since 1791. Features of the United States Constitution, such as its explicit protection for property rights, discourage rentseeking entrepreneurship. At various points since the ratification of the Constitution, American policymakers have modified the country’s formal institutions with amendments that had the net effect, at least in the short term, of discouraging rentseeking entrepreneurship and channeling the energies of entrepreneurs into more socially-productive activities. This paper presents an explanation for why the effectiveness of these formal institutions in deterring rent-seeking entrepreneurship in the United States has varied over time. We develop a generalizable process model based on our findings and then explain how this model can useful in future research on a wide range of countries.