Public Goods, Redistribution and Rent Seeking

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The bottom you were might send been, or largely longer asks. Why clearly be at our site? Rent-seeking is distinguished in theory from profit-seeking , in which entities seek to extract value by engaging in mutually beneficial transactions. The Tullock paradox is the apparent paradox , described by Tullock, on the low costs of rent-seeking relative to the gains from rent-seeking. The paradox is that rent-seekers wanting political favors can bribe politicians at a cost much lower than the value of the favor to the rent-seeker.

Luigi Zingales frames it by asking, "Why is there so little money in politics?

Pdf Public Goods, Redistribution And Rent Seeking

Several possible explanations have been offered for the Tullock paradox: [10]. 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 market share. Taxi licensing is a textbook example of rent-seeking. 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.

Regulatory capture is a related term for the collusion between firms and the government agencies assigned to regulate them, which is seen as enabling extensive rent-seeking behavior, especially when the government agency must rely on the firms for knowledge about the market. Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition.

Often-cited examples include a lobby that seeks economic regulations such as tariff protection, quotas, subsidies, [16] or extension of copyright law. Economists such as the chair of British financial regulator the Financial Services Authority Lord Adair Turner have argued that innovation in the financial industry is often a form of rent-seeking. The phenomenon of rent-seeking in connection with monopolies was first formally identified in by Gordon Tullock. Critics of the concept point out that, in practice, there may be difficulties distinguishing between beneficial profit-seeking and detrimental rent-seeking.

Often a further distinction is drawn between rents obtained legally through political power and the proceeds of private common-law crimes such as fraud, embezzlement and theft. This viewpoint sees "profit" as obtained consensually, through a mutually agreeable transaction between two entities buyer and seller , and the proceeds of common-law crime non-consensually, by force or fraud inflicted on one party by another. Rent, by contrast with these two, is obtained when a third party deprives one party of access to otherwise accessible transaction opportunities, making nominally "consensual" transactions a rent-collection opportunity for the third party.

From a theoretical standpoint, the moral hazard of rent-seeking can be considerable. If "buying" a favorable regulatory environment seems cheaper than building more efficient production, a firm may choose the former option, reaping incomes entirely unrelated to any contribution to total wealth or well-being. This results in a sub-optimal allocation of resources — money spent on lobbyists and counter-lobbyists rather than on research and development , on improved business practices, on employee training , or on additional capital goods — which retards economic growth.

Claims that a firm is rent-seeking therefore often accompany allegations of government corruption, or the undue influence of special interests.

Account Options

Rent-seeking can prove costly to economic growth; high rent-seeking activity makes more rent-seeking attractive because of the natural and growing returns that one sees as a result of rent-seeking. Thus organizations value rent-seeking over productivity. In this case there are very high levels of rent-seeking with very low levels of output. Ultimately, public rent-seeking hurts the economy the most because innovation drives economic growth. Government agents may initiate rent-seeking — such agents soliciting bribes or other favors from the individuals or firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer.

As a country becomes increasingly dominated by organized interest groups, it loses economic vitality and falls into decline. Olson argued that countries that have a collapse of the political regime and the interest groups that have coalesced around it can radically improve productivity and increase national income because they start with a clean slate in the aftermath of the collapse. An example of this is Japan after World War Two. But new coalitions form over time, once again shackling society in order to redistribute wealth and income to themselves.

However, social and technological changes have allowed new enterprises and groups to emerge. A study by Laband and John Sophocleus in [29] estimated that rent-seeking had decreased total income in the US by 45 percent.

Both Dougan and Tullock affirm the difficulty of finding the cost of rent-seeking. Rent-seekers of government-provided benefits will in turn spend up to that amount of benefit in order to gain those benefits, in the absence of, for example, the collective-action constraints highlighted by Olson.

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Similarly, taxpayers lobby for loopholes and will spend the value of those loopholes, again, to obtain those loopholes again absent collective-action constraints. The total of wastes from rent-seeking is then the total amount from the government-provided benefits and instances of tax avoidance valuing benefits and avoided taxes at zero. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth.

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See also: endowment. Also known as: diversifiable risk. This preference may be derived either from pure impatience or diminishing marginal returns to consumption. Those working in the home raising children, for example, are not considered as being in the labour force and therefore are classified this way. The maximum amount that you could consume and leave your wealth unchanged. Also known as: disposable income. See also: gross income. Also known as: economies of scale.

Economics of Income Redistribution

See also: decreasing returns to scale , constant returns to scale. It is common to set its value at in the reference period. Industrial Revolution A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy.

Manufacturing is the most important component. Temporary tariff protection of this sector or other support may increase productivity in an economy in the long run. Also known as: non-accelerating rate of unemployment, stable inflation rate of unemployment. Usually measured over a year. See also: deflation , disinflation. Also known as: Schumpeterian rents. See also: solvent. See also: patent , trademark , copyright. See also: nominal interest rate , real interest rate. See also: intergenerational inequality , intergenerational mobility , intergenerational transmission of economic differences.

See also: intergenerational elasticity , intergenerational mobility , intergenerational transmission of economic differences. Upward mobility occurs when the status of a child surpasses that of the parents. Downward mobility is the converse. A widely used measure of intergenerational mobility is the correlation between the positions of parents and children for example, in their years of schooling or income. Another is the intergenerational elasticity.

See also: intergenerational elasticity , intergenerational transmission of economic differences. See also: intergenerational elasticity , intergenerational mobility. See also: interest rate , profit. It was popularized as an economic concept by the economist Robert Shiller. Also known as: total gains from exchange or trade. Joule A unit of energy or work, originally defined as the amount of energy necessary to lift a small apple vertically 1 metre. See also: employment rent , efficiency wages. They are either employed including self-employed or unemployed. See also: unemployment rate , employment rate , participation rate.

See also: capital-intensive. This is the Nash equilibrium of the labour market because neither employers nor workers could do better by changing their behaviour. See also: equilibrium unemployment , inflation-stabilizing rate of unemployment.

Pdf Public Goods, Redistribution And Rent Seeking

Economists say that employers are on the demand side of this market, while employees are on the supply side. See also: labour force. If a good were sold at different prices in different places, a trader could buy it cheaply in one place and sell it at a higher price in another. See also: arbitrage. This rate will typically be above the policy interest rate: the difference is the markup or spread on commercial lending.

Also known as: market interest rate. See also: interest rate , policy rate. Leontief paradox The unexpected finding by Wassily Leontief that exports from the US were labour-intensive and its imports capital-intensive, a result that contradicts what the economic theories predicted: namely that a country abundant in capital like the US would export goods that used a large quantity of capital in their production. See also: balance sheet , asset. The competitive process results in an outcome that is difficult to change, even if users of the technology consider an alternative innovation superior.

This is very useful for working with growth rates. See also: technology , institutions , short run model , medium run model. Lorenz curve A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one.

An Overview Of Rent-Seeking Behavior

The extent to which the curve falls below this perfect equality line is a measure of inequality. See also: Gini coefficient.