What is 'Rent-Seeking'
Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don't create any benefit for society; they just redistribute resources from the taxpayers to the company.
BREAKING DOWN 'Rent-Seeking'
According to Adam Smith, individuals and businesses can earn income from three sources: profit, wages and rent. Generating profit usually requires risking capital in hopes of a return, while earning wages tends to be labor-intensive and requires hard work. Rent is the easiest and least risky type of income one can earn, as it requires only the ownership of resources and the ability to use those resources to generate income through lending their use to others. Because rent income necessitates less risk or work than other types of income, it follows logically that individuals and companies seek to earn this income whenever possible. Rent-seeking becomes a problem when entities engage in it to increase their share of the economic pie without increasing the size of the pie.
How Rent-Seeking Works
Rent-seeking occurs when an individual or business attempts to make money from its resources without using those resources to provide a benefit to society or generate wealth for everyone. One of the most common ways companies in the 21st century engage in rent-seeking is by using their capital to contribute to politicians who influence the laws and regulations that govern and industry and how government subsidies are distributed within. If the company succeeds in receiving subsidies or in getting laws passed that restrict competition and create new barriers to entry into the industry, it has increased its share of existing wealth without increasing the total of that wealth. Moreover, it has earned income without actually producing anything or putting its capital at risk.
Lobbying for occupational licensing requirements represents a perfect example of rent-seeking. Airline pilots and doctors require rigorous licensing for obvious reasons, but in many U.S. states, expensive and onerous licensing is required for taxi drivers, florists and interior decorators. Often, these regulations exist as a result of lobbying efforts from existing industry participants. When licensing requirements prevent newcomers from competing, the revenue generated within an industry is divided between fewer players, resulting in a larger share of wealth accruing to each without any additional economic benefit. Furthermore, since competition drives down prices and lack of competition keeps them high, consumers pay more than they would in a truly efficient market unfettered by rent-seeking.