Rent-seeking, and the puzzle of why political favours come so cheap
Suppose a single government rule would hand a company a billion dollars. Economist Gordon Tullock noticed that such favours can often be bought for around ten million, roughly one percent of the prize. That gap, now called the Tullock paradox, sits at the heart of what economists mean by rent-seeking.
Rent-seeking means enlarging your own wealth by bending public policy or market conditions rather than by producing anything new. The rent involved has little to do with leases. It comes from Adam Smith's split of income into profit, wages and economic rent, and David Ricardo used the word in the 19th century for land rent. Serious study took off only after two influential papers, Tullock's own in 1967 and one by Anne Krueger seven years later. The contrast is with ordinary profit-seeking, where both sides of a deal gain and wealth grows.
Why is so little money in politics, as Luigi Zingales put it, if favours are worth so much? Several answers have been offered. Voters may punish politicians who pocket big bribes or live lavishly. Rival politicians competing to sell favours can drive the price down. And because such deals cannot be enforced in court, mutual distrust keeps what officials can demand low.
A common route is regulatory capture, where firms effectively steer the agencies meant to oversee them, especially when regulators depend on industry for market knowledge. Lobbying for tariffs or quotas is a classic example. Cartels and outright bribery are illegal in many market economies. The deeper cost is diverted effort: money spent on lobbyists and counter-lobbyists instead of research, training or equipment. One 1988 estimate by Laband and John Sophocleus put the loss to total US income at 45 percent, though measuring it remains hard.
Mançur Olson argued in The Rise and Decline of Nations that countries grow sclerotic as interest groups pile up, and that a regime collapse can wipe the slate clean, as in Japan after the Second World War. A 2013 World Bank study found elected officials in stable, rich democracies least prone to handing out rents. Joseph Stiglitz ties the practice to American income inequality.
Source: Rent-seeking
