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.

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