TAP CHI KHOA HOC SO 8 www.htu.edu.vn
RENT-SEEKING AND ITS IMPLICATIONS FOR PUBLIC POLICIES
Nguyen Dinh Tho, Assoc. Prof., PhD
Hatinh University, Hatinh, Vietnam, [email protected]
ARTICLE INFO ABSTRACT
JEL Classifications:
B 1 3 , D 7 2 ; 0 3 1 , H 3 , 0 1 5
Keywords:
Neoclassical Economics Rent Seeking Innovation Public Policy Resources
Rent-seeking is a process through which scarce resources, i. e. time, money and efforts of people are unproductively devoted to seek for incomes which are over and above that would be received in any competitive use of their resources. Those incomes are known in economic term as rents. The theory of rent- seeking which emerged more than only a couple of decades ago has, however, been contributed with a number of analyses by many economists in various aspects.
Tullock's [II] theft analysis. Krueger's [6]
study of premium seeking, Posner's [7]
monopoly seeking investigation. Bhagwali and Srinivasan's [I] examination of revenue seeking and many others' contributions have lively depicted the rent-seeking picture. The focus of this paper is to examine the different
types of rents under the light of neoclassical methodology and their implications for public policv
•6-7594 2016Joumal of Science, Vol \
RENT-SEEKING AND ITS IMPLICATIONS FOR PUBLIC POLICIES
Nguyen Dinh Tho'
TOM TAT
77m kiem td chenh lech la mdt qud trinh md qua do cdc nguon luc khan hiem, nhu thdi gian. tien bgc vd sue luc khdng duac sir dung cho hogt ddng sdn xudt md ddnh cho viec lim kiem cdc khodn thu nhdp sieu ngach cao han so vai khi ngudn luc khan hiem do dugc sir dung trong mdi trudng cgnh tranh. Cdc khodn thu nhgp sieu ngach dugc biet den trong thudt ngir hnh te Id td chenh lech. Ly thuyet ve tim kiem Id chenh lech mai dugc nghien cuu vdi thdp ky trudc day. Tuy nhien, nhieu chuyen gia kinh te trong cdc khia cgnh khdc nhau da tich cue ddng gdp cdc nghien cuu cua minh trong ITnh vuc ndy. Tullock [II] phdn tich hien tugng trdm cdp, Krueger [6] nghien cuu thu nhdp thdng du. Posner [7] nghien ciru ddng ca tim kiim doc quyen, Bhagwati vd Srinivasan [1] kiem dinh hien tugng tim kiem doanh thu vd rdt nhieu ddng gdp khdc da md td todn cdnh nghien cuu ve tim kiem td chenh lech mpt cdch sdng ddng. Trpng tdm cua bdi viet ndy la nghien cuu cdc logi hinh tim kiim td chech lech khdc nhau duai dnh sdng cua ly thuyet vd phuang phdp tdn cd dien vd phdn tich tdc ddng cua chiing ddi vdi chinh sdch cdng.
Tu khoa: Kmh te hoc Tan co di^n, Tim ki^m to chenh lech. Doi mdi, Chinh sach cong, Nguon luc
1. Introduction to t>pes of rents
It is generally accepted that rent-seeking activities are harmful to the society because of its unproductive atuibute. This section will demonstrate that rents can either be socially harmful and damage efficiency or be socially beneficial and enhance efficiency.
/. / Monopoly rents
Monopoly rents may derive from natural restrictions of entr\ when a single producer dominates the market as a result of their talented ' PGS TS. Truang Dai hoc Ha Tinh
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TAP CHI KHOA HOC SO 8 www.htu.edu.vn
Qc Quantity C<Hnpetltlve market
iiiiKhn(1»7,p 21)
management skills, advanced level of technology or simply their economies of scales that prevent others from entering the market. Monopoly rents can also derive from artificial restrictions of entry created by the state (Khan [5], p. 25; Tollison [10], p. 575-7). The typical discussion on monopoly rents is focused on their effects to social costs in terms of welfare economics. These effects are best demonstrated in the illustrated diagrams. Under competitive market condition, the equilibrium condition sets the price at Pe with the corresponding quantity Pe- The total social benefit AEF are distributed to consumers shown by EFPe and to producers (usually factor providers) shown by AEPe-
Monopolistic entry restrictions allow firms to limit their supply at Qm which is lower than Qe in
order to raise the price to Pm and obtain the monopoly rent BCDP™ which shows the additional profit which firms could not make in a competitive market. Such rent is not a loss however. It is simply taken by the owners of the firm but neither consumers nor factor providers. The social loss known as
deadweight welfare loss, therefore, is the triangle CDE which is completely lost as a result of monopolies (Khan [5], pp. 22-6; Tollison [10], pp. 579-80).
Thus, in terms of allocation efficiency, monopoly rents are socially harmfiil since resources are not allocated in a way that maximizes social benefit.
At an extreme situation, which will be discussed in section tibree of this paper, the effects are even worse, when resources are diverged from productive uses for the purpose of rent-seeking (Tollison [10], pp. 581, Posner [7], pp. 808-9, Bhagwati [2], pp. 997-8). However, as far as dynamic economics is concerned, monopolies may either curtail or enhance growth. For example, monopolies may expand investment from theu large profits; hence accelerate growth, or monopolies created naturally by their superior in technology will eventually enhance growth rates (Khan [5], p. 27).
Price
' • B
A s F
CanaiinK. Marginal c o s t / S i o p ^
K " ^ 5 ^ 1 \ Wel&iB Ijjss
?io\\tar~y^C 1 \ v S i i p l i j / 1 \ /^ i j Demand
1 i
Qm Qt Quantity Monoptdy Rents
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TAP CHi KHOA HOC so 8 www.htu.edu.vn 1.2. Natural resource rents
Rents created by natural resources by its scarcity in nature is shown in the illustrated diagram. For simplicity, we assume the demand curve is perfectly elastic. Ricardo ([8], Chapter E-III) postulates that yields from final piece of land that is exploited must compensate the owner's efforts, and previous pieces of land yield rents to their owners. In other words, as the productive powers of land are restricted, to obtain each and every additional output from new additionally employed piece of land more and more efforts are needed, which is reflected by
the marginal cost AC. The rent, therefore, is depicted by ABP which accmes to the landlords of previously employed pieces of land. Khan ([5], p. 28) takes the case of a fishery as an example, and arrive at a conclusion that the rent shown by ABP accrues to the owners of the fishery.
However, more interestingly, he shows the case of freely-fishing (for the fishery did not belong to anyone) would result in
^(iw,.p2B) dissipated rents since for a large number of fishermen, each fisherman is likely to look at average cost of fishing to see whether they have covered that cost or not at the market price offish. Therefore, they will fish until the outputs reach Q:, where the price of fish equals the average cost of fishing. The dissipated rents are reflected by the aggregate difference between the marginal cost of fishmg that higher the selling price and the selling price itself, which is shown by BCE. To an extreme, these dissipated rents may even outweigh their gains from natural resource rents which he describes as 'Tragedy of the Commons".
Namral resource rents, therefore, should be maintained by the creation of property rights so that they can secure allocation efficiency of scarce resources and avoid dissipated rents that are socially harmfiil and damage growth and development
1.3. Rent created hy transfers
The artificial created incomes through pure transfers by governments' intervention usually have rem-Iike characters, that is to sa>. they are higher than the usual incomes that people could perceive under competitive market condition.
Transfers may be made in fomis of grams from govermnent. tax exempts, or
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TAP CHi KHOA HOC S6 8 www.htu.edu.vn subsidies, etc. These rent-like incomes are more often than not merely redistributed amongst different groups in the societies, hence have no welfare impHcation (Khan [5], p. 30). However, if the transfer triggers off incentives that result in potential changes in outputs, welfare loss wiU be likely to occur. The matter can be simply observed under the analysis by Varian ([12], pp. 83-7). As a result of governments' subsidy PdEdE^Ps, consumers benefit additional rent-like surplus PdEdEP« while producers enjoy PsEsEPe- The triangle EEdEs is clearly social deadweight welfare loss in this case. Thus, in terms of allocative efficiency, rents created by transfers can either be neutral or socially harmfiil.
The rents created by transfers are really the same as the situation described as ttieft in Tullock's analysis. Theft
itself is not a loss in terms of welfare economics smee it is pure redistribution from the owners to thieves. However, in preventing theft, resources are diverged for producing locks, buying insurance, etc. That is actually a loss. In the ease of rents created by transfers, scarce resources may also be devoted to seek for extra incomes from rents.
We have seen that the incentive inefficiency in case of rents created by transfers may curtail growth as a result of misallocation of resources. However, in many eases, rents due to transfers would enable firms to capture higher level of technology or raise investment that will finally enhance growth.
1.4. Schumpeterian rents
Schumpeterian rents are those rents which are received from firms' innovative activities or policy-induced encouragement for iimovative or learning process. Producers may earn rents since they are more superior than others in terms of management skills, technical progress, etc., which allows them to produce at the cheaper costs in comparison with the prevailing average social level. For simpHcity, suppose m a two-level marginal-cost economy, those producers who can produce more efficiently than others for the reasons explained enjoy the lower level of marginal cost shown as PjC in the accompanying figure.
These producers, therefore, earn a rent which is depicted in the diagram as the Subsidies' effects
Alaptedfion Varian (I9E9, p. H)
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Schumpeterian rent Pj ADP2.
The rent is clearly socially beneficial since it is obviously not a transfer from anyone else, but an additional amount of value to the society that have been created by efforts of innovators to search for more efficient way of allocation of resources (Buchanan [3], pp. 4-5). If the new method of production is applied freely by all other producers, societies would benefit more. The social additional benefits from that new production method would be P]BCP2 if there are no restrictions either by the producers themselves or by the protection of the law. In fact, however, these restrictions are
apparent and societies suffer from a loss known as potential deadweight welfare loss ABCD. Societies must accept this loss for a certain period of time since without innovative activities, societies would not have such gains to lose. Furthermore, innovators' efforts should be rewarded by the rent to encourage others, otherwise no innovative activities will
be searched for. After some time, the new production method will be smdied by other producers and/or the protection penods will expire, social marginal costs are reduced to the new level Pi. and consumers will enjoy the whole benefits of innovations (Khan 1997, pp. 30-4).
The process of learning or even copying is also socially usefial, especially m the context of developing countries where scare resources are not enough to devote to innovative activities. Leaming and copying must be readily easier and cheaper. In such a case, the conditional subsidies granted by governments to encourage firms to leara are necessary to enhance technological progress and accelerate economic growth. The figure depicts
Schumpeterian Rents Quantity
Price
Cocdi
_- R. -: ^ ^
0
C--^
Q
'^:v:
CoDditiona] SubiKJiesasSchumFfiie^-r. ''
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the conditional subsidies in the form of Schumpeterian rents offset the substantial difference between domestic marginal cost and marginal cost with foreign technology and allow firms to produce outputs Qi- If firms satisfy conditions for subsidies and catch up foreign countries after a specific time, the country in question will be better off producing at new marginal cost and reaching outputs Q2. If firms, however, can not learn after the specified fime have lapsed, societies suffer a loss and withdrawal of subsidies should be considered (Khan [5], pp. 35-6).
Schumpeterian rents, therefore, are generally socially beneficial in terms of both allocative efficiency and growth enhancement since they are essential source for encouraging innovative and leaming process that gradually increases the technology levels of a society.
2. Implications for the theory of rent-seeking
The analysis of different types of rents has important implications for the theory of rent-seeking smee both the harmful and useful effects of such rents are clearly shown. Rent-seeking is usually referred to process through which scarce resources are unproductively devoted to create, maintain, or transfer some certain set of rights on which rents are based. Smee the activities are unproductive, rent- seeking theories more often than not, emphasize the negative side of rent-seeking, i.e. its unproductive expendimres to capture rents, say, inputs of rent-seeking. This is a very misleading and short-sighted viewpoint because rents themselves are socially beneficial as we have already seen in section two. The social benefit of rents, therefore, must be considered as outputs of rent-seek ing so that the overall picmres of rent-seeking effects can be drawn.
Net social benefit can be measured on the basis of the difference between social value of created rights and rent seeking cost. Then, social value of created nghts can be measured by growth and efficiency implications of these rights. Finally rent-seekmg cost is input cost used up in rent-seeking activities On this measuring fundamental, the overall effects of rent-seeking are summarized by Khan (1997) in the figure. In quadrant 1, the overall effect of rent-seeking is allocation inefficiency and stagnation. On the conhary, quadrant IV shows the state of rapid growth and economic efficiency. The effects are ambiguous in the rest two quadrants.
The quadrant IV can be achieved under the assumptions of efficient market mode! of neoclassical econoimcs, i.e. there are no rents in competitive market. In the presence of rents, however, Krueger [6] analysis of premium seeking shows that the social deadweight loss is not only the usual welfare loss triangle, but high rent- seeking costs will be incurred as people compete for rents. Posner ([7], pp. 809-15)
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assumes that if there exist a rent in a certain indushy people will consume products of other industry to compete for such rents as long as the rents cover their expenditure.
Thus, monopoly rents are not simply transfers from consumers to owners of firms but actually the loss, hence social welfare loss is the total trapezoid but not the usual triangle. Buchanan [3] assumes people prefer more to less, hence they are likely to compete for rents whenever they exist. He points out three levels of rent-seeking trigger off a large amount of resources wasted in the process. These smdies of rent- seeking models insist on the wasteful attribute of high rent-seekmg costs that damage social welfare and try to induce policy-makers to follow liberalization policies. This sort of rent-seeking model can be locate at the quadrant 1 in the figure.
Social Value of Rent
•* Negative Positive •
High
Rent- Seeking
Cost
I Rent-Seeking j i Model J I. Stagnation and
IneffFiciencv
II Lost opportunilies due to higti rcnt-seclcing costs
- Likely Range of Actual Rent-Seeking Processes
III. Lost opportunities due to damaging rents
beine created
IV. Rapid Growth and/or Economic Efficiency
Overal Effects of Rent-Seekme Processes
Congleton [4] analyzes different institutional stmcmres and concludes that levels of competitions and kinds of competitions are affected by different instimtions. Rogerson [9] shows that different firms face different fixed organization costs m forming organization and obtaining information to take part in rent-seeking. These contributions assert that rents do not always trigger off large rent-seeking cost.
Bhagwati ([2], pp.998-0) descnbes the effect of tariff seeking process and discovers the fact that rent-seeking does not always create value-reducing rents, but also creates value-enhancing rents which he calls as a paradox. The complicated analysis of a tliree good economy under a subsidy model by Varian [2] proves that it is obviously not paradox since his analysis shows that the
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TAP CHI KHOA HOC SO 8
distortions may be either amphfied or mitigated by rent-seeking activities.
3. Conclusion
We have examined different kinds of rents under the light of neoclassical economies and demonsft-ated that these rents can be either socially harmful or beneficial. This conclusion is extremely important because thefr implications for public policy making are clear. Rent-seeking activities are obviously unproductive activities. However, the existence of rents is not always harmfiil to societies.
Rent-seeking outputs in many eases may add new value to societies and actually make societies better off Therefore, in the analysis of rent-seeking for policy purposes. The inputs and outputs of rent-seeking process must be clearly identified. Otherwise, this will lead to misleading policies to be approved that may damage efficiency and growth rates.
R E F E R E N C E
[1], Bhagwad, J.N., and Snnivasan, T. N. 1980. "Revenue Seeking: a Generalizanon of the Theory of Tariffs." Journal of Political Economy, Vol. 88 (1980):
1069-97.
[2]. Bhagwati, J. 1982. "Directly Unproductive, Profit-seeking (DUP) Activities".
Journal of Political Economy, Vol. 90, number 5, 1982.
[3]. Buclianan, J.M.1980. "Rent-seeking and Profit-seeking in" in J. Buchanan, R,D. Tollison and G Tullock (eds.). Towards a Theory of Rent-Seeking Society. College Station: Texas A&M University Press.
[4]. Congleton, Roger 1980. "Competitive Progress, Competitive Waste and Institutions, in J. Buchanan, R,D. Tollison and G. Tullock (eds.). Towards a Theory of Rent-Seeking Society. College Station: Texas A&M University Press.
[5]. Khan, M.H. and Jomo, K.S. 1997. (mimeo in two volumes) Rent and Rent-Seeking.
[6]. Krueger, Anne. 1974. "The Political Economy of the Rent-seeking Society".
American Economic Review, June
[7]. Posner, Richard. 1975. "The Social Costs of Monopoly and Regulation".
Journal of Political Economy, August 1975.
[8] Ricardo, David. 1817. On the Principles of Political Economy and Taxation, edited with an introduction by R. M. Hartwell. Penguin Book, 1971.
[9] Rogerson, W.P. 1982. "The Social Costs of Monopoly and Regulation; A Game Theoretic Analysis". Bell Journal of Economics, vol. 13.
[10] Tollison, R.D. 1982. "Rent-Seeking: A Survey". A:y/a05, Vol 35, 1982.
[11]. Tullock, Gordon. 1967 "The Welfare Costs of Tariffs, Monopolies, and Theft", Western Economic Journal, 5:3, June 1967, pp. 224-232
[12]. Vanan, H. 1989. "Measuring the Deadweight Costs of DUP and Rent Seeking AcUvities". Economics and Politics, 1.
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