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Political incentives for rent creation

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Abstract

Rent-seeking is often depicted as a contest in which rent-seekers compete for a prize—the rent. In the process of rent-seeking, much or perhaps all of the rent is dissipated through the costs the contestants incur to compete. Rent dissipation is inconsistent with the incentives of both the rent-seekers and those who create the rents. Policymakers have an incentive to create rents only if they gain from the process, and their gain comes from sharing any surplus that goes to those who obtain the rents. A surplus can be created through a barrier to entry into rent-seeking. When institutions that generate barriers to entry into rent-seeking break down, rent-seeking competitions can occur in which all rents are dissipated, but this should be a special case rather than the general rule in rent-seeking.

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Notes

  1. In some models, rents may not go to the highest bidder for various reasons, but in most cases the literature does depict rent-seeking as a contest that the highest bidder wins.

  2. Five of the eight chapters refer to rent-seeking as a contest in their titles, and the other three clearly depict rent-seeking as a contest in their models.

  3. Congleton (1988) notes that the standard rent-seeking model understates the welfare loss of rent-seeking in the complete dissipation case because it does not consider the potential productivity gains that might have been realized had those dissipated resources been invested in productive activity.

  4. Perceived abuses of the patent system led Parliament to pass the Statute of Monopolies in 1624 which repealed all existing patents and monopolies and limited future patents to novel inventions.

  5. Nti (1999) develops a model in which different contestants place different values on the rent and looks at the incentives facing the contestants. In this case, the rent creator should grant the rent to the individual who values it the most, because that maximizes the amount that the rent recipient and the rent creator can divide, consistent with Becker’s (1983) framework. Still, the joint benefit is maximized when the rent-seeking costs are minimized.

  6. A referee points out that firms often make losses in the short run because of risky projects that do not pan out, or R&D expenditures that do not result in profitable projects. Of course this is true in the real world, but in neoclassical competitive equilibrium, firms produce homogeneous products using a given production function, which rules out risky projects and R&D (all firms produce the same product using the same production technology). More relevant, in neoclassical competitive equilibrium, all firms earn a normal rate of return. The neoclassical competitive model is useful as an example because people refer to the equilibrium result that above-normal and below-normal profits are eliminated as analogous to the competitive rent-seeking result in which the rents are completely dissipated, when in fact the results are not analogous.

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Authors and Affiliations

  1. Florida State University, Tallahassee, FL, USA

    Randall G. Holcombe

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  1. Randall G. Holcombe
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Correspondence to Randall G. Holcombe.

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I am grateful to Roger Congleton, Russell Sobel, Todd Zywicki, two referees from this journal, and participants in the 2016 annual meeting of the Public Choice Society for insightful comments. Remaining shortcomings are the responsibility of the author.

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Holcombe, R.G. Political incentives for rent creation. Const Polit Econ 28, 62–78 (2017). https://doi.org/10.1007/s10602-016-9228-4

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