What is 'Rent-Seeking'?

Rent-seeking is an individual's or entity's use of company, organizational or individual resources to obtain economic gain 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 do not create any benefit for society but merely 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 the hope of a return while earning wages tends to be labor-intensive. Rent is the easiest and least risky type of income because it requires only resource ownership and the ability to use those resources to generate income by lending their use to others. Because rent income implies less risk or work than other types of income, individuals and companies seek to earn this income whenever possible. Rent-seeking becomes a problem when entities engage in the practice 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 benefit to society or generate wealth. One of the most common ways companies engage in rent-seeking is by using their capital to influence politicians. Politicians decide the laws and regulations that govern industry and how government subsidies are to be distributed. If a company succeeds in receiving subsidies or in getting laws passed that restrict competition and create new barriers to entry for an industry, it has increased its share of existing wealth without increasing the total of that wealth. Moreover, it has earned income without being productive or putting its capital at risk.

Examples of Rent-seeking

Lobbying for occupational licensing requirements represents a perfect example of rent-seeking. Airline pilots and doctors require rigorous licensing. However, in many U.S. states, expensive and onerous licensing is also 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, fewer players share the revenue generated. Thus, a larger share of wealth accrues to each without any additional economic benefit. Moreover, since competition drives down prices and a lack of competition keeps prices high, consumers pay more than they would in a truly efficient market that is unfettered by rent-seeking.

RELATED TERMS
  1. Wealth

    Wealth is a measure of the value of all of the assets of worth owned ...
  2. Capitalism

    Capitalism is an economic system whereby capital goods are owned ...
  3. Open Market

    An open market is an economic system with no barriers to free ...
  4. Active Income

    Active income refers to income received from performing a service.
  5. Wealth Management

    Wealth management is a professional service that combines various ...
  6. IRS Publication 910 -

    A document published by the Internal Revenue Service (IRS) that ...
Related Articles
  1. Investing

    Natural Resource Investing

    ETFs and futures are two of the many investment options available to natural resource investors.
  2. Investing

    Which Industry Spends the Most on Lobbying?

    All major companies have lobbyists gunning for their interests in DC. Here is a breakdown of the top spenders on lobbying.
  3. Managing Wealth

    How to Find the Best Wealth Manager

    Finally there exists a small number of financial advisors who can be considered modern wealth managers. Here's how to find them.
  4. Managing Wealth

    The Rich Are Getting Richer – Even More

    The wealth distribution gap in the U.S. continues to grow, aided by recent gains in the stock market.
  5. Investing

    A Study On The Wealth Effect And The Economy

    The notion that the wealth effect spurs personal consumption makes sense intuitively. After all, wouldn’t you be more inclined to buy that big-screen TV or SUV if your house or stock portfolio ...
  6. Small Business

    Government Subsidies For Business

    Many industries rely on government assistance in both good times and bad. What are the benefits of these programs, and how do they impact the consumer?
  7. Insights

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  8. Financial Advisor

    Career Advice: Investment Banking vs. Wealth Management

    Take a comparative look at two of the most popular career choices in the financial sector, wealth management and investment banking.
  9. Financial Advisor

    Why Advisors Should Consider Natural Resource ETFs

    Natural resource investments, such as ETFs, can be an attractive long-term addition to a client's portfolio.
  10. Insights

    How Governments Influence Markets

    The government, the biggest influence in the markets today, can create some unintended consequences.
RELATED FAQS
  1. What is comparative advantage?

    Comparative advantage is an economic law that is foundation for free-trade arguments. Read Answer >>
  2. How do government subsidies affect the profitability of the airline industry?

    Read about the history of government subsidies to American airline companies since 1918, and why it benefits large companies ... Read Answer >>
  3. How does government policy impact microeconomics?

    Read about how any type of government policy necessarily impacts the microeconomic decisions that are made by individuals ... Read Answer >>
  4. Licenses for hedge fund manager

    Obtain the pertinent information about the various types of licenses a hedge fund manager needs to have to legally operate ... Read Answer >>
  5. What are the advantages of a limited government in connection with a capitalist economy?

    Read about the advantages of limited government, why free markets are more efficient and how social cooperation grows where ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center