Rent-seeking Costs Research Articles

The cost of rent seeking: Reply

We find little to quarrel with in Gordon Tullock's (19??) comment on our paper (Dougan and Snyder, 1993). Much of his comment serves to remind us that the deadweight costs of redistributive policies dwarf any measures of rentseeking costs. Our paper argues that those deadweight costs may help limit the amount of potential transfers that are dissipated through rent-seeking activity. We argue further that this aspect of policy may be by design rather than due to ignorance. It is only on this latter point that we and Tullock differ. The starting point of our paper, as reiterated by Tullock, is that in a democracy the voters are the ultimate decision makers, and this has profound implications for the form of redistributive policies as well as for the identities of the winners and losers under those policies. This observation by itself is certainly not original with us. What we claim as a consequence of this point is that many regularities in the design of redistributive policies can be explained as foresighted attempts to limit subsequent rent-seeking costs. That is, we have offered an explanation of some of the most puzzling aspects of policy design that does not depend entirely on voter ignorance. Tullock evidently prefers to explain those aspects of policy design as attempts by some majority of voters to fool the corresponding minority. This is an empirical claim, however, not a logical necessity, so it does not constitute a refutation of our paper. It is difficult to argue simply that the majority consists of well-informed producers (i.e., factor owners) who benefit at the expense of poorly informed consumers, since in general equilibrium every voter is a member of both groups. (This is another way of saying that it is not possible to raise all relative prices.) Second, the same logic that predicts that voters will be rationally uninformed also predicts that no one will vote. Since we do observe voter turnout rates substantially greater than zero on a sustained basis, we might well conclude that there are consumption aspects to voting. But if this is so, there may also be consumption aspects to information acquisition. There is nothing particularly farfetched about this observation: Fans of professional baseball are often well informed about the batting averages of the players on their favorite teams

Are rents fully dissipated? Comment

The measure of the cost of rent-seeking has been difficult and its theory is complicated. For example, I devoted to the first half of my The Economics of Special Privilege and Rent Seeking (1992) to the mysterious fact that the apparent size of the rent-seeking industry is considerably smaller than the resources obtained. This raises the question of whether there are, in fact, concealed expenses or that entrepreneurs are making mistakes. The Dougan-Snyder (1993) article raises and attempts to answer the problem. They assume a case in which $100 is distributed to the first 1000 people who are at a given point at noon of a specified day. One would expect that this prize would be wholly dissipated by people coming long distances, getting in early in the morning, etc. They call this rent-seeking, and it is legitimate, although unusual, use of the word.' There is another set of rent-seeking costs. These are costs of impelling the decision or policy makers to make the award. It is this second meaning of the term that attracts most attention from students. To repeat, it is not illegitimate of Dougan-Snyder to talk about the first meaning, but they should not ignore the second. In their model the decision maker simply decides to make a gift to certain people. There is no pressure brought to bear on him; resources are not used to convince him that he should. Altogether, this is quite unlike what we normally see when Congress is handing out money. I am not alleging that waste in the process of handing out the money is unimportant. However, the pressure brought to bear on policy makers to make the distribution is what has normally been discussed under the title of rent-seeking. Take the U.S. agricultural program which provides benefits to the farmers at a cost to society very much larger than those benefits. The benefits themselves are modest even to the farmers. The farmers bring a good deal of pressure to bear on the political representatives to keep the program going, and this is what we normally think of as rent-seeking costs, and not the allocative inefficiency waste that the program generates. However, Dougan and Snyder perform a service by bringing these allocative wastes to our attention. The cost to the United States of the farm program is of the order of $20-

Rent dissipation through self-regulation: The social cost of monopoly under threat of reform

This piece offers an alternative perspective on the social cost of monopoly and rent seeking. An existing monopolist whose right is contested in a political market has an incentive to expend resources on direct lobbying efforts while also attempting to defuse reformist opposition. Because the strength of reformist opposition will generally be a function of the monopolist's past, present, and expected future pricing/output decisions, such opposition is endogenous. The probability that an existing monopoly right will be retained depends on both direct lobbying efforts by the monopolist as well as the strength, resolve, and cohesiveness of the reformers. By modifying its output/pricing decision and, in effect, engaging in self-regulation, the monopolist gives up current profits in exchange for the expected future profits associated with retaining its monopoly rights. Such opposition dissipating effort is a form of indirect rent seeking that is complementary to direct lobbying efforts. And unlike the Tullock costs implied by the incumbent's direct lobbying, this form of indirect rent seeking may imply a reduction in the social cost of monopoly.

The Welfare Costs of Price Controls for Cars and Color Televisions in Poland: Contrasting Estimates of Rent-Seeking from Recent Experience

The welfare costs of price controls can vary enormously, depending on the method of allocating the goods in shortage and the possible rent-seeking costs that may result. With full rent dissipation, the welfare loss from price controls on Polish color televisions in 1989 was about ten times the standard estimates of distortion costs, which ignore rent-seeking, and was more than 100 percent of the value of domestic producers' sales. The methods of allocating cars, however, did not result in rent-seeking costs. The domestic price controls were an unintended implicit subsidy to imports. Subsidies for cars were estimated at 43 percent and for color televisions at 22 percent.

Tax Abatements and Rent-seeking

Recent literature has argued that a policy of invariant tax abatement awards is more costly than necessary, and has suggested several ways of improving tax abatement policy by allowing officials discretion in granting abatements. This paper argues such discretion carries its own dangers, and may well create rent-seeking costs larger than the other costs it is meant to avert. Analysis suggests tax abatements should be abandoned as a development policy. More generally, rent-seeking should be recognised as an important concept in the analysis and evaluation of development programmes.

The First U.S. Food Stamp Program: An Example of Rent Seeking and Avoiding

Abstract.Rent seeking involves the wasteful expenses incurred to secure, acquire, or maintain a monopoly position. Rent avoiding involves the expenditures undertaken to avoid the imposition of rent-seeking costs. Each represents a social cost of Tullock rectangle loss in addition to the dead-weight or Harberger triangle loss that combined to form the Harberger-Tullock trapezoid social cost. The first Food Stamp Program in the United States came about through the rent-seeking and/or rent-avoiding efforts of farmers, grocers, bankers, and other economic agents and did not lead to the promotion of social welfare. The evidence of these self-interested efforts was gleaned from articles in the New York Times and government documents. The first Food Stamp Program also fits the economic theory of regulation developed by Stigler, Jordan, Peltzman and others, and it involved imposed costs on economic agents as the program evolved.

The usefulness of inefficient procurement

Inefficient procurement can be an optimal second best means of encouraging public goods production. In the absence of political rents, politicians have no motivation to incur the costs of setting a procurement agenda. We construct a model where defense contractors earn excess profits and use some portion of these profits to goad or bribe politicians into procuring. The optimal amount of “inefficiency” in procurement is sensitive to the marginal rent seeking cost of obtaining defense contract dollars.

Does It Make Sense To Double Count? Problems in Assessing Rent-Seeking Costs

Identification of the welfare costs associated with rent seeking depends sensitively on the conditions that pertain to each case being considered It is dangerous to suppose that a particular rule will apply across the board. This argument is illustrated with respect to two examples. In the first example, the extent of rent-seeking costs is shown to depend on whether or not rent seekers are able to benefit from the X-inefficiency that is created by monopoly provision. In the second example, the alleged preference that external diseconomies be corrected by regulation rather than by penalty taxes is shown to be sensitive to individuals'perception of tax costs.

The Nature, Significance, and Cost of Rent Seeking in Ghana

Rent seeking involves wasteful expenses. This paper explores the nature, significance, and cost of rent seeking in Ghana, a small developing country with substantial government intervention in economy activity, using the methods for India of Krueger (1974) and Mohammad and Whalley (1984). However, rent-seeking cost is measured not only by import licenses for which foreign exchange is not available. The estimation of rent-seeking cost in Ghana is calculated for two different years, 1981, the end of the last elected civilian administration, and 1984, an era of military rule. Copyright 1991 by WWZ and Helbing & Lichtenhahn Verlag AG

Rent seeking with uncertain opposition

It is observed that sometimes dispersed interests are passive to rent seeking by concentrated interests and that sometimes they provide rigorous opposition. This paper assumes that opposing political activism is triggered when rents accruing to concentrated interests exceed a threshold level, unknown to the latter. In these conditions, rents will increase asymptotically to a level less than the trigger level. The threat of opposition means that social costs of rent seeking may be less than found by static analysis under certainty. The model may be applicable to certain types of regulation, such as taxi licensing or pollution control.

The Cost of Rent Seeking: Is GNP Negative?

The Cost of Rent Seeking: Is GNP Negative?

X-efficiency, rent-seeking and social costs: Reply

Contrary to their claim, Naughton and Frantz fail to disprove the fundamental difference in the social costs of rent-seeking and X-inefficiency identified in our paper. Nor have they shown that our measure of the social costs is incorrect. What they have done is introduce, in an ex post fashion, fixed costs for X-inefficiency. But they fail to provide any explanation of why the inefficiency should take the fixed cost form or why there should be unrecoverable sunk costs. Quite aside from the issue of dissipation, Naughton and Frantz also argue that the level of rent-seeking cost is inherently vague, a contention with which we disagree.

Constitutional design for a rent-seeking society: Voting rule choice

If rent-seeking costs are considered in addition to, and separate from, external costs and decision costs in Buchanan and Tullock's economic theory of constitutions, total interdependence costs may have multiple local minima close to the decision-making extremes. As a result, the global minimum, which gives the optimal decision rule, may be much closer to “unanimity rule” or “individual rule” than to “simple majority rule”. Further, the comparison of the minimum total interdependence costs for the public sector with those for the private sector would only justify a smaller scope and size for the public sector than would be the case if rent-seeking costs were ignored. Finally, systematic variation in rent-seeking cost could account for dramatic regime shifts between dictatorship and democracy.

Industrial Sickness, Primary and Secondary: The Effects of Exit Constraints on Industrial Performance

In an attempt to protect workers from unemployment, governments in some countries subsidize firms which would otherwise fail. This article examines the effects of such subsidies on output, prices, and welfare. It also briefly reviews the effects for varying price elasticities of supply and demand, for nontraded and fully traded goods, and for firms in which wages exceed their free market level. If the firm produces a nontraded good, the “sickness” of one firm that is subsidized to maintain production can spread to other firms that would be viable in the absence of the subsidies. The analysis shows that the exit constraints have the most detrimental effect when the elasticity of demand is low and supply elasticity is high, and when the government weighs the welfare of the firm's workers and consumers less than that of the general taxpayers and the firm owners. When labor costs are higher than their free market levels and output is thus less than the optimal levels, the subsidies could have an effect similar to that of an optimal production subsidy. In practice, however, this possibility is likely to be outweighed by associated rent-seeking costs and other distortions.

Nonconventional costs of rent-seeking: X-inefficiency in the political process

There is relatively little controversy about the expenditures of time and money devoted to lobbying, campaign contributions, and so on that bias the political process. However, these traditional rent-seeking costs appear to be quite different from nonconventional costs of rent-seeking such as those associated with the lack of information about policies that distort the democratic process. It is likely that deviations from the ideal pattern of behavior arise not only in markets but also in the democratic process (as Tullock suggests) because voters are not properly informed. The problem of identifying waste due to lack of motivation and/or information is similar whether in the political arena or in market activities. In neither situation is X-efficiency observable. Ex post there will always be situations in which it is obvious that potential opportunities were foregone, but to the extent that such “wastes” either in markets or in the political process cannot be avoided, they have no importance for identification of inefficiency or for public policy. The conclusion is that X-efficiency theory contributes little to our understanding of rent-seeking actions by individuals and groups to obtain transfers of wealth through the political process.

Does transferability affect the social costs of licensing?

Occupational licensing that restricts entry into various occupations may be imposed in order to create monopoly profits. Such licensing has traditionally been associated with the creation of two types of social costs: first, a deadweight loss due to the reduction in output (Harberger, 1954) and second, the rent-seeking costs of monopoly (Tullock, 1967). A recent contribution to the literature (Lott, 1987) suggests that the total social costs of licensing depend on whether the licenses are transferable; to wit, nontransferability will add production inefficiency costs to the traditional Harberger-Tullock costs. Specifically, if the skills of the initial licensees atrophy, nontransferability will preclude the production of services by more efficient would-be license holders. This implies that the traditional HarbergerTullock analysis underestimates the total social cost of licensing in the case where licenses are nontransferable. The purpose of this note is to argue that the size of the total social costs associated with licensing are independent of transferability. Transferability does

Uncertain monopoly rent and the social cost of rent seeking

Assuming that monopoly rent is uncertain, we derive a dissipation rate formula that generalizes the Hillman and Katz formula. We show that for large enough variance, the dissipation rate increases with mean monopoly rent.

X-efficiency, rent-seeking and social costs

This paper investigates shifts in cost functions of monopoly and regulated firms operating under conditions of X-inefficiency and rent-seeking behavior. We show that X-inefficiency and rent seeking have significantly different implications for economic welfare. Distinctions are drawn between pecuniary and real X-inefficiency and between sunk and continuing rent-seeking costs. In general, for a given cost shift rent-seeking behavior implies larger social costs than does X-inefficiency theory. However, cost shifts caused by either X-inefficiency or rent seeking are observationally equivalent. This implies empirically measured cost shifts cannot unambiguously be attributed to either cause.

The costs of rent seeking: A metaphysical problem

The costs of rent seeking: A metaphysical problem

Pollution control through price incentives: The role of rent seeking costs in monopoly markets

We consider the effect of rent seeking costs on the design of an efficient pollution tax. Earlier work has concluded that a pollution tax levied on an otherwise unregulated monopoly should always be less than the Pigouvian rate. This study demonstrates that if rent seeking costs are present, the appropriate discharge tax for a monopoly firm can equal or exceed the marginal damage from its pollution. Calculations reveal that under a wide range of conditions the ideal corrective tax for a monopoly firm is very close to the fully internalizing Pigouvian tax.