Toward a More Complete Theory of Rents and Rent-Seeking

Posted: July 11, 2015 in Political economy, rents
Tags: , , , ,

Rents, as a construct in political economy, are usually associated with monopolies and imperfect competition and markets.  In the literature, rents always never represented value created in production but represented a portion of the created value captured during the distribution process.  In short, rents are not created values but captured values.  In this sense, rents represent pure transfer of resources from one economic actor to another; the transfers are mediated either through the market, the state, or non-market, non-state mechanisms or institutions.  The economic actors may either be private agents or institutions or public entities.

But all general statements will have to be qualified.   Consider Tullock’s (1988: 51) example:  the person who invents and patents a cure to cancer (or AIDS) will be considered a public benefactor even if he became extremely wealthy by claiming monopoly rents on the patent.

In the main, there are three types of rent differentiated according to mode of “creation” and disposition: market rents, public choice rents, and non-market, non-state rents.  Market rents (or Rent I) are rents created by natural or structural market imperfections or market power.  When we say natural market imperfections, we mean market imperfections that are not caused by state action such as licenses or tariffs.  If a public utility monopoly endures because huge capital requirements deter the entry of others, then we have a natural or structural market imperfection.  The structural monopoly earns monopoly rents.  The best example of a market rent is the classic landlord rent.

Some type I rents attract “good” rent-seeking, the latter concept defined as the expenditure of resources towards the capture of rent.  An example is the cancer cure patent mentioned earlier.  To the extent that the rent is successfully captured, i.e., the invented cure was successful and could be patented, the resources expended to capture the rents from the patent could not be considered to be deployed wastefully.   In contrast, the use of resources to capture ownership of a choice piece of real estate is not only wasteful but also criminal.

Public choice rents (or Rent II) are the rents created by the state when it restricts entry to the market.   This rent type attracts wasteful rent-seeking; the “right” to capture the rent may be sold to the highest bidder. However, it could be also be dispensed or deployed by the state to favored parties.  If the state restricts market entry or competition, the actor who captures public choice rents also earns monopoly rents.  The distinction between rent-seeking and rent-dispensing is an important one and will surface in the subsequent discussion on rents and development.

The third type (or Rent III) are rents created by non-economic, non-state bodies (including churches, mass media, and political parties) but are sought and could be captured by anybody–businessmen, state officials, politicians, or private citizens.  While these bodies are not strictly state or market (for profit) agencies, they can create rents because they also enjoy monopoly power of sorts.

Religions monopolize the supply of spiritual goods while mass media may monopolize information.  In this sense, the rents that they can earn are quite similar to market or monopoly rents.  This rent type may also attract rent-seeking, albeit of a kind quite different from public choice rent-seeking.  Let us illustrate this last point with the Iglesia Ni Kristo (INK) in the Philippines.  The INK is obviously a newer and smaller religious organization than the Catholic Church.  But it is considered to have a stronger political clout than the latter; INK members supposedly vote as a single bloc according to the dictates of their Church leaders.   For this reason, INK leaders are wooed every which way by politicians and their brokers for electoral support.  In return, the INK supposedly gets material and non-material rewards from their clients.  Other examples are supplied by Hutchcroft (1996): the AC-DC (attack and collect-defend and collect) politician and journalist.

The fourth type of rent (Rent IV) are “criminal rents” earned from benefices granted by the powers-that-be to operate or maintain gambling, prostitution, gun-running, illegal drugs, and other illegal businesses without fear of persecution or harassment in exchange for a cut of the proceeds.  Antonio Sanchez, the sentenced mayor of Calauan, Laguna (for rape and murder) appears to be a beneficiary of such a right and has apparently disposed of his rents in conspicuous consumption, patronage, pay-offs to appropriate patrons.[1]   This rent type is usually associated with means of coercion and violence.

One can still identify a fifth type of rents (Rent V) if the state itself is construed as a rent-seeking agent vis-a-vis other states and other international actors, which are rent-assignors.  Official development assistance and military credits are examples of this rent type and are actively sought after by many states in the developing world, including the Philippines.  This type of rent is often associated with the development of clientelistic relations between the donor-state and the recipient-state.

Depending upon the active agent, it is also important to distinguish between private rent-seeking and public rent-seeking.  Murphy, Shleifer and Vishny (1993: 412) define private rent seeking as taking the form of “theft, piracy, litigation, and other forms of transfer between private parties” while public rent-seeking is “either redistribution from the private sector to the state, such as taxation, or alternatively from the private sector to the government bureaucrats” taking the form of lobbying, corruption, and the like.  While we may or may not fully subscribe to the notion that taxation is rent-seeking, public rent-seeking provides the bridge between rent-seeking and the much older concept of corruption.

How do we relate rent-seeking and corruption?  In a situation where the state (or a state agency) creates rents, the normal economic reaction of private actors is to use all means–legal, extra-legal, and illegal–to capture them.  Lobbying government officials is a legal way while bribery is an illegal way of capturing rents.  The bribe can be seen as the purchase price of a good or a service that the state officially owns but is now appropriated privately and personally by government officials.  In so far as officials have discretion over the provision of these goods, they can collect bribes from private agents (Shleifer and Vishny 1993: 599).

A key flaw of much of the rent-seeking literature (of the public choice school) must be fully elucidated.  Rents and rent-seeking, especially in their pejorative sense, are concepts that had been defined with reference to a fairy tale–that of perfect competition.   To the extent that competition and markets are imperfect, then rents will always be available for capture.

It is true that the public choice literature had fired its strongest guns against state-created rents (or Rent II).  But as we have pointed out, not all rents are created by the state nor do all rents attract wasteful rent-seeking.  A whole category of rents will exist and continue to exist because certain economic assets will remain scarce relative to demand.  Type II rents will disappear only if the state disappears.  And lastly, one can raise the valid question whether all rent-seeking efforts are necessarily wasteful?

Among other reasons, the competition between rent-seekers is considered by public choice literature to be wasteful.  The resources expended by rent-seekers are resources that could have been used for more productive purposes.   In an ironic twist to neoclassical logic, it is suggested that restricting the competition for rents may reduce wasteful rent-seeking.  If one follows this line of reasoning, the least wasteful situation is one where an absolute dictator, who will brook no complaint, will dispense rents as he sees fit.

It could be shown however that competitive rent-seeking can flourish in the most authoritarian political setting simply because the dictator cannot make all decisions.  Below the apex of power,  there will be many decision-makers at all possible levels who could compete with each other for the rents or for the power to dispense the rents according to the their competencies.  The existence of these officials will similarly attract wasteful rent-seeking.  It is true of course that the competition for rents is not fully open even in democracies. The costs or wastes associated with rent-seeking are thus limited, as Jomo and Gomez (1995) explain.

An opposite scenario, which is consistent with neoclassical economics, may develop with respect to public rent-seeking, or at least, in the case of bribes.  If producer A can buy a government good more cheaply than producer B, then he can outcompete the former in the product market.  The cheapest way to purchase a government good is to bribe a government official at a rate lower than the official level–a transaction labeled as corruption with theft by Shleifer and Vishny (1993).[2]   So if producer A bribes an official to reduce his costs, his competitors must do so also.  Competition between buyers of government goods will spread cost-reducing corruption, i.e., corruption with theft, across the economy.  But the greater demand for cheaper government goods (meaning a greater supply of bribes) will boost bribe rates to just a shade lower than the official prices.  Downward pressure on the bribes could come from the competition among bribable government officials.  However, it would be easier for them to collude to keep bribe rates up than for consumers to unite for lower rates.

Finally, it is likewise useful to distinguish between rent-seeking, the expenditure of resources to capture rents created by the state; and rent-assigning, the granting by the state, or by any of its officials or agencies, of rents or of opportunities to capture rents to selected private or public actors.  These processes need not be mutually exclusive in the sense that some private actors may still seek rents even as the state assigns them.  Nonetheless, one can say that the more rents are assigned and are known to be assigned by the state or its leaders and officials, the less the rent-seeking will be.

Notes:

[1]   A well-placed source informed me that Sanchez was the chief main­tainer of  jueteng in Southern Luzon and was grossing an average of P 350 million daily.   In his pay-off list are national-level officials and politicians, high-ranking military and police officials, down to the lowly barangay-tanod (village guard)..

[2]  In the case of corruption without theft, the government official charges an amount (the bribe)on top of the official price of the good.  He turns over to the government treasury the amount corresponding to the official price and pockets the bribe.  In the case with theft, the official charges a bribe lower than the official price and does not turn in anything to government.

References

Hutchcroft, Paul (1996). “Corruption’s Obstructions: Assessing the Impact of Rents, Corruption, and Clientelism on Capitalist Development in the Philippines.” Paper read at the annual meeting of the Association for Asian Studies, Honolulu, Hawaii.

Jomo, K. S. and Edmund Terence Gomez (1995). “Rents, Rent-Seeking and Rent Deployment in Malaysia.” (Typewritten.)

Murphy, Kevin, Andrei Shleifer and Robert Vishny (1993). “Why is Rent-Seeking So Costly to Growth?” American Economic Review Papers and Proceedings 83(2): 409-414.

Shleifer, Andrei and Robert Vishny (1993). “Corruption.” Quarterly Journal of Economics 108(3): 599-617.

Tullock, Gordon (1988). “Rents and Rent-Seeking.” In The Political Economy of Rent-Seeking, pp. 51-62.  Edited by Charles Rowley, Robert Tollison, and Gordon Tullock. Boston: Kluwer Academic Publishers.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s