What is Rent-Seeking?

Rent-seeking is the act of growing one's existing wealth by manipulating the social or political environment without creating new wealth. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic efficiency through misallocation of resources, reduced wealth creation, lost government revenue, heightened income inequality, risk of growing political bribery, and potential national decline.

In many market-driven economies, much of the competition for rents is legal, regardless of any harm it may do to an economy. However, various rent-seeking behaviours are illegal, such as the forming of cartels or the bribing of politicians.

Rent-seeking is distinguished in theory from profit-seeking, in which entities seek to extract value by engaging in mutually beneficial transactions. Profit-seeking in this sense is the creation of wealth, while rent-seeking is "profiteering" by using social institutions, such as the power of the state, to redistribute wealth among different groups without creating new wealth. In a practical context, income obtained through rent-seeking may contribute to profits in the standard, accounting sense of the word.

Source: https://corporatefinanceinstitute.com

The Tullock paradox (by Gordon Tullock) is the apparent paradox on the low costs of rent-seeking relative to the gains from rent-seeking. The paradox is that rent-seekers wanting political favours can bribe politicians at a cost much lower than the value of the favour to the rent-seeker. For instance, a rent seeker who hopes to gain a billion dollars from a particular political policy may need to bribe politicians with merely ten million dollars, which is about 1% of the gain to the rent-seeker.

The classic example of rent-seeking, according to Robert Shiller, is that of a property owner who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee to lower the chain. There is nothing productive about the chain or the collector, nor do passing boats get anything in return. The owner has made no improvements to the river and is not adding value in any way, directly or indirectly, except for himself. All he is doing is finding a way to obtain money from something that used to be free.

An example of rent-seeking in a modern economy is spending money on lobbying for government subsidies in order to be given wealth that has already been created, or to impose regulations on competitors, in order to increase one's own market share.

The concept of rent-seeking would also apply to corruption of bureaucrats who solicit and extract "bribe" or "rent" for applying their legal but discretionary authority for awarding legitimate or illegitimate benefits to clients. For example, taxpayers may bribe officials to lessen their tax burden.

Rent-seeking is not limited to any singular country or region. Rent-seeking manifests and impacts many different societies and economies. 

The oil industry in Nigeria is heavily impacted by rent-seeking. Nigeria is a rich in oil reserves, but sees a large amount of its profits siphoned of by corrupt officials and individuals who are engaging in rent-seeking behaviour, leading to a wide income gap between the wealthy and the poor, as well as widespread poverty and political instability.

Malaysia too suffers from the disease of rent-seeking. And the possible solutions to this problem include:

• Having a bipartisan Parliamentary Oversight Committee on all concessions, subsidies, monopolies, permits and the like;

• More transparency and accountability in Government and companies;

• Reduce barriers to entry, i.e. create more competition; and

• Implement a special tax on rent-seekers beyond and above corporate tax.

Reference:

Rent Seeking, Wikipedia