Political Economy and the Three Sources of Rents

Abstract

A huge political economy literature claims “rents” matter. They influence corruption, democracy, and political stability. Researchers assume rents are interchangeable. But Market Power Rents differ fundamentally from Ricardian Rents, and both differ from Quasi-rents. Researchers also assume rents are exogeneous, even though government policies affect firms’ costs and their ability to offset depreciation. And once generated and extracted, rents circumscribe governments’ actions. Some types fuel vicious circles. Other types fuel virtuous ones. Using the oil industry as a laboratory, we explicate these points. We argue oil is not sui generis, however. When governments nationalize and tax their oil sectors into the ground, it reflects their relatively short time horizons. This is similar to when the state imposes price controls on any industry, making it impossible for economic actors to recover their long run costs. And this makes it more likely weak states will continue to appropriate Quasi-rents across economic sectors, fueling underdevelopment.