Social Cost Of Rent Seeking Research Articles

The Welfare Loss from Monopoly Re-visited: Rent Seeking and Protectionism

In a 1954 paper, A. C. Harberger claimed that the welfare loss from monopoly in United States manufacturing was less than one tenth of one percent of national income over 1924-1928. This led to additional claims of low monopoly welfare loss and eventually to a counter-argument in favor of adding a rent-seeking cost equal to part or all of the economic profit to this loss. These arguments assumed a passive role for government. In this paper, by contrast, governments are active and seek to maximize their political support. The political support maximum then depends on the nature of the political system and, in particular, on how inclusive this system is. The same is true of the monopoly welfare loss, which becomes largely the social cost of rent seeking plus the social cost of protectionism—or of protecting existing profits by restricting investment that would increase competition in markets where these profits are earned. Protectionist measures lower innovation and the growth of total factor productivity, but can still be a good source of political support in a political system where inclusiveness is moderate to low. This can explain not only the existence of inefficiency and of large monopoly welfare loss, but also their persistence and the persistence of large differences in total factor productivity between nations.

Rent seeking and the excess burden of taxation

The social costs of rent seeking and the excess burden of taxation have been studied and evaluated independently. We show that, when rent seekers earn taxable income, there is interdependence between the two types of social losses. Rent seeking increases the excess burden of taxation under risk neutrality when leisure is non-inferior. We derive a condition for rent seeking to increase the excess burden of taxation under risk aversion. When rent seekers can earn taxable income, rent seeking is more socially costly than is inferred from contest models alone, because of an increased excess burden of taxation.

Rent Seeking and the Excess Burden of Taxation

The social costs of rent seeking are generally evaluated with respect to rent dissipation. A common assumption is complete rent dissipation so that the value of a contested rent is the value of social loss. When rent seekers earn taxable income, there is interdependence between the social cost of rent seeking through rent dissipation and the excess burden of taxation. Through the addition of substitution to rent seeking beyond leisure, rent seeking increases the excess burden of taxation under risk neutrality when leisure is non-inferior. We derive a condition for rent seeking to increase the excess burden of taxation under risk aversion. Our conclusion is that, when rent seekers can earn taxable income, rent seeking is more socially costly than is inferred from contest models alone, because of an increased excess burden of taxation.

THE EMPIRICAL MEASUREMENT OF RENT-SEEKING COSTS

This survey focuses on the efforts, carried out mainly by public choice scholars, to measure the social cost of rent seeking. The concept, introduced by Gordon Tullock in 1967 and coined by Anne Krueger in 1974, is well known and accepted by the profession, but its empirical measurement has fallen behind with respect to its theoretical formulation, an often criticized lack in the literature. Although there are good general surveys, none has specifically focused on reviewing the empirical efforts made to measure the phenomenon. The purpose of this paper is to provide such a survey. It could be said that the rent-seeking concept has been fully integrated into economic jargon. It is commonly used when some agent seeks to obtain an artificial transfer, usually from government, and covers all the actions, efforts or expenses that the agent has to carry out to obtain the prize. The key issue, however, is the possible social waste that arises in these situations. The empirical efforts to measure such waste constitute the main purpose of this survey. The concept of rent seeking was introduced by Tullock (1967), although the term was first coined by Krueger (1974) in a paper not related to the former. In a recent paper, Tullock himself wrote of the history of the concept and the intellectual context within which it arose (Tullock, 2003). Starting with the pioneering work by Harberger (1954), several studies were conducted during the 1950s in which the calculation of the social cost of monopolies and tariffs always gave the result of very modest figures. The first response to these results was made by Leibenstein (1966) and his 'X-efficiency', which refers to a hypothetical loss in efficiency due to the absence of competition. Shortly after Leibenstein's paper appeared, Tullock argued that the deadweight costs of monopoly and tariffs understate the true social cost because the expenditures made to capture related rents have to be included; so rectangles as well as Harberger's triangles have to be included in the calculations. Let us see this argument once more. Figure 1 depicts the iconic Tullock graphic analysis of rent seeking. It represents the demand schedule (D) for a monopolized good, where Pm is the monopoly

The social cost of rent seeking in Europe

Direct measurement of the social cost of rent seeking is impeded by non-observable and non-reported activities. We use a dynamic stochastic general equilibrium model to compute the social cost of rent seeking in Europe. Our estimate is based on competition among interest groups for privileges provided by governments, including income transfers, subsidies, and preferential tax treatment. The model, which is calibrated to the euro area as a whole and also to individual euro member countries for 1980–2003, performs well vis-à-vis the data. We find that significant proportions of GDP are extracted as rents available to be sought by rent seekers.

Enduring rents

Rent seeking is often studied with reference to a contemporaneous rent evaluated at a point in time. We study the social cost of rent seeking when rents endure over time, but may have to be re-contested because of imperfect rent protection, or may disappear because of deregulation. The present value of a contested rent measures the social cost of rent seeking, irrespective of imperfect rent protection and the prospect of deregulation. Rent seeking is discouraged by the inability of governments to commit to protect rents and by their inability to commit to rent-generating regulations and policies. Moreover, lasting deregulation can preempt a substantial fraction of the potential rent seeking cost.

The social cost of rent seeking when consumer opposition influences monopoly behavior

In this paper, we show how consumer opposition to monopoly rents affects choice of monopolistic price, and thereby determines the social cost of rent seeking. Our model differs from pervious analyses, which have been based on the assumption that the monopolist always chooses the profit-maximizing monopoly price, which is not, however, a rational behavior for a monopolist confronting consumer opposition.

Which Rectangle?: An Extension

This note examines the social cost of rent seeking when firmsseek rent by obtaining government subsidies as well as bysecuring a monopoly position. The social cost of rent seekingproves to be represented by the new Tullock rectangle.

Rent seeking and rent setting with asymmetric effectiveness of lobbying

This paper provides a more general model of the determination of rent-seeking costs by combining the following features: endogenous rent determination, asymmetric effectiveness of contending agents in their lobbying efforts, and multiple periods. In doing so, the paper generalizes some aspects of the work of Applelbaum and Katz (1987), Rogerson (1982), Leininger (1992) and Kohli (1992). Some results obtained are: (i) in the short run, when the regulator's salary is higher than in an alternative occupation, both the per unit cost of rent-seeking and the total rent set by regulator are highest for the same value of the relative effectiveness parameter; (ii) in the long run, an increase in the effectiveness parameter leads to a reduction in the social costs of rent seeking; (iii) in a repeated game, the equilibrium rent is lower the higher is the regulator's discount factor.

The social cost of rent seeking under countervailing opposition to distortionary transfers

This paper shows that the entry of opposition to a transfer which raises overall Tullock outlays is welfare-enhancing when the number of rent-seekers is large. The spending of the opposition exceeds the fall in the combined spending of rent-seekers. Opposition when there is a single rent-seeker or an entrenched beneficiary is never welfare-enhancing. The larger the number of aspirants to a transfer, the smaller is the number of consumers required to render the consumer lobby ineffective when free riding is allowed.

The Social Cost of Rent Seeking by Labor Unions in the United States

The conventional welfare loss to trade unions and collective bargaining has been put at some fraction of 1.0 percent. Added to this should be the costs of resources deployed by the parties as they compete for monopoly gains. These additional social costs turn out to be on the same order as the conventional welfare loss. The analysis finds in passing that the investment by union members in paying dues yields very handsome dividends.

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.

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.

Transfer seeking and avoidance: On the full social costs of rent seeking

We would like to thank Gordon Tullock and an anonymous referee of this journal for their helpful comments and suggestions.(This abstract was borrowed from another version of this item.)