On the limits to rent-seeking waste

Conclusions

The general equilibrium framework developed in this paper for analyzing the limits to rent-seeking waste goes beyond the existing literature by incorporating tax-financed, public subsidies and rent-protecting activities into a rent-seeking environment. We show that the limits to rent-seeking waste depend on the extent to which government subsidizes rent seekers and rent defenders through tax-financed grants, contracts and favors. As observed by Tullock (1967), the diversion of resources toward efforts to acquire a monopoly rent causes a social waste in addition to the excess burden of monopoly pricing measured by the Harberger triangle. In the absence of government subsidies to rent-seeking and under competitive conditions, this additional waste cannot exceed the maximum monopoly rent attainable. However, if government subsidizes expenditures on rent-seeking, then the additional waste can exceed the Tullock rectangle of monopoly rent and, in the limit, equal the economy's maximum potential social surplus.

Rent avoidance expenditures reduce the rent to be captured and thus discourage rent-seeking. If rent avoidance is a relatively efficient mechanism for transferring consumer surplus to rent granters, then rent-seeking expenditures are displaced by less wasteful expenditures on rent defending. As a result, under competitive conditions, unsubsidized demand for private rent protection may be socially efficient. Nonetheless, the upper limit to rent-seeking waste depends on constitutionally determined maximum rates of public subsidies to rent-seeking and rent-avoidance activities.