Analyse rent-seeking distortions using Tullock’s framework + low levels of rent dissipation. Flashcards
(16 cards)
1
Q
Analyse rent-seeking distortions using Tullock’s framework + low levels of rent dissipation.
TMI RCI IFRDP
A
Theory
Model Examples
Incentives + Institutions
Regulatory Capture, Credentialism, Innovation Suppression
Institutional Asymmetry, Free-Riding, Risk & Uncertainty, Diminishing Returns, Public Scrutiny - Politicians
2
Q
Intro - ATEA
A
- Rent-seeking can be defined as the ATTITUDE behind non-productive activities that aim to capture economic rents, seen best in political settings with methods like lobbying, regulatory capture, and campaign finance.
- Gordon TULLOCK showed that resources spent on rent-seeking are socially wasteful and create deadweight loss; however, Tullock’s paradox crucially showed how observed expenditures are often much less than the rent’s value.
- This ESSAY will use Tullock’s framework to explore the broad economic inefficiencies of rent-seeking, then outline a range of theoretical and institutional factors to explain why it is often much cheaper than expected to purchase market power/ monopolies - why rent dissipation levels are low.
- As ACEMOGLU and Robinson (2012) argue, the persistence of rent-seeking is not merely a market failure but an institutional one. In systems with extractive institutions—where political and economic power reinforce each other—rent-seeking is not an aberration but a structural outcome.
3
Q
Theory - MAHR
A
- Tullock’s rent-seeking MODEL plots quantity on the x-axis and price on the y-axis, with marginal benefits sloping downward and marginal costs sloping upward.
- We can ASSUME that, in a competitive market, rational actors invest up to the full value of the rent in order to receive the entire rewards of its resources, where the two graphs intersect, which is known as complete rent dissipation.
- HOWEVER, there are many distortions created in the graph by companies which push the quantity in a competitive market down/ left of the x axis in order to push the prices up.
- This RESOURCE misallocation means that capital and labour is diverted from productive economic activity to lobbying and influence-seeking.
4
Q
Model Examples - DLKGFR
A
- For example, a DOMESTIC steel company might lobby the government to impose tariffs on imported steel instead of investing in better production tech, becoming more competitive globally.
- The company uses money and political influence to LIMIT the quantity of purchasable steel through limiting foreign competition, making consumers pay higher prices and stalling innovation.
- Ann KRUEGER delineated the argument of the defence industry to show how rent-seeking destroys wealth instead of creating it, especially when the cost of chasing the rent rivals or exceeds the rent itself.
- GOVERNMENTS spend billions on defence contracts for weapons, tech, and vehicles.
- FIRMS compete to win these deals, not by improving their product but by hiring top lobbyists, building political alliances, funding think tanks/ campaigns, and “revolving doors” (ex-military and officials working for defence firms).
- RESOURCES do not go into innovation or cost-cutting, but into influencing who gets the contract.
5
Q
Incentives + Institutions - BME
A
- The incentives to lobby are strong: the BARRIERS to entry of competitive markets are high, often needing deep political ties.
- MONITORING of lobbying methods is often weak and opaque, and profits are huge.
- These dynamics reflect what Acemoglu and Robinson describe as EXTRACTIVE institutions—settings in which political influence is systematically used to secure economic advantage, and where rules are designed or manipulated to entrench elite control.
6
Q
Examples of Rent-Seeking - RCI
A
Regulatory Capture
Credentialism
Innovation Suppression
7
Q
Regulatory Capture - RIFGAV
A
- REGULATORY capture is when a regulatory agency - created to act in the public’s interest - ends up being influenced and controlled by the industry it is supposed to regulate.
- INSTEAD of protecting the public, the regulator ends up protecting the industry and increasing the price available under a competitive market by limiting the quantity of people/ products allowed in.
- Regulatory capture has influenced critical points such as the 2008 FINANCIAL crisis, as pre-2008, regulators like the SEC and the Fed ignored rising risk in housing/finance.
- The GRAMM-Leach-Bliley Act (1999) eventually deregulated banking under lobbying pressure, leading to such shaky financial instruments as Collateralised Debt Obligations.
- ALTHOUGH this did not directly push down the quantity to increase price, it did distort financial markets by obscuring risk. Investors overpaid, allocating too much quantity to a low-productivity sector, raising financial sector rents at social cost due to a lower real output.
- This reflects what Acemoglu and Robinson call the “VICIOUS circle,” where economic power feeds into political power, and vice versa—resulting in institutions that no longer act as neutral referees, but as tools for entrenching rents.
8
Q
Credentialism - EPLRDA
A
- This can be seen in EDUCATION credential inflation, with professional associations lobbying to increase educational requirements for entry-level jobs (e.g., law, real estate), making students spend more years and money on degrees that do not necessarily improve productivity.
- These create barriers to entry for POORER individuals, with inequality and elitism further entrenching rents, often locking out new entrants, and using licensing laws to restrict market access for low-income entrepreneurs.
- Credentialism creates entry barriers, social stratification, and rent for incumbents in the LEGAL profession, with bar associations lobbying to mandate law degrees and bar passage, even for simple legal services.
- REAL estate agents also require costly licensing courses with little skill relevance and licensing now covers ~30% of U.S. jobs, often unjustifiably (Kleiner & Krueger 2010).
- Licensing DISPROPORTIONATELY hurts low-income & minority communities, with black women in states like Louisiana having to do 500+ hours of cosmetology training to braid hair, laws enforced by cosmetology boards dominated by industry insiders.
- ACEMOGLU and Robinson’s lens is again useful: these exclusionary practices persist not because they are efficient, but because institutions have evolved to serve organised insiders over potential challengers, embedding rent-seeking in everyday policy.
9
Q
Innovation Suppression - IN EHD
A
- INNOVATION suppression is when incumbents rent-seek to block disruptors, for example taxi unions resisting Uber. This means resources are spent defending the status quo instead of adapting, reducing variety/ quantity of competitors to set price higher.
- In NEW York, taxi medallion owners lobbied to block or restrict ride-sharing, though Uber reduced consumer prices and improved availability (Zervas, Proserpio & Byers 2017). Incumbents used lobbying to increase regulation and protect old rents, delaying innovation.
- In some cases, the ENTIRE value of the rent is eaten up by this rent-seeking activity - high rent dissipation.
- HOWEVER, in reality, the market price is often much lower to acquire these rents.
- Such resistance to innovation illustrates the DEEPER function of extractive institutions: to suppress creative destruction when it threatens existing rent-holders.
10
Q
Why Cheaper - IFRDP
A
Institutional Asymmetry
Free-Riding
Risk & Uncertainty
Diminishing Returns
Public Scrutiny - Politicians
11
Q
Institutional Asymmetry - FEFA
A
- U.S. FIRMS lobby for $100s of billions in subsidies and tax breaks, yet spend relatively little; for example, pharma industry lobbying costs around $300M/year vs multi-billion subsidies.
- The method of ‘EVERGREENING’ involves minor drug modifications to extend patents, with Humira extending patents 100 times in the U.S. to block biosimilars.
- Robin FELDMAN (2018) shows 78% of new drug patents are for existing drugs due to these huge incentives to block competition and attain high rent payoff.
- This reflects what ACEMOGLU and Robinson identify as “institutional asymmetry”: the rules are already written to benefit large incumbent actors. Firms need not spend heavily when institutional design favours them.
12
Q
Free-Riding - FOTPP
A
- The idea of ‘FREE-riding’ delineates how, in large groups, individuals under-contribute to lobbying, with each actor hoping that others will pay the cost, while all benefit from success.
- This draws on OLSON’S Logic of Collective Action (1965), which says that small collectives can organise efficiently but, as the number of people increases, each vote becomes exponentially less pivotal in shaping the result and voting becomes less likely.
- TRADE agreements like TRIPS (WTO) contain IP protections that allow U.S. pharma companies to extend monopoly pricing globally which create multi-billion-dollar international rents where only a few firms lobby and the rest free ride.
- Companies like PFIZER invest heavily in lobbying Congress to shape IP clauses in trade deals. Smaller or mid-sized pharma firms benefit from those same protections but don’t contribute to the lobbying efforts, hoping the big players will secure those rents anyway.
- This is a PUBLIC goods game among competitors where all benefit from extended IP protection but lobbying is costly and success is non-excludable.
13
Q
Risk & Uncertainty - PBL
A
- The rent-seeking game is PROBABILISTIC: as rent is not guaranteed, rational actors adjust lobbying below its expected value due to risk aversion.
- Firms lobby for tax credits but bills frequently stall or get repealed, for example BUILD Back Better, a proposed $1.75 trillion bill in 2021 by the Biden administration which fell short of its expected lobbying funding because the bill faced significant uncertainty and firms are risk-averse.
- This would have included LARGE green energy subsidies, tax credits, and public investments, but the risk and uncertainty lead to the companies hesitating to commit and hence lower rent-dissipation.
14
Q
Diminishing Returns - NPOAW
A
- Political influence is NON-linear: after a point, more lobbying has little effect, especially where institutions such as media outlets can limit rent extraction.
- This can influence PUBLIC scrutiny, triggering public backlash and reputation damage.
- For example, the OIL and gas industry which has spent large amounts on lobbying to secure favourable regulations. However, increased lobbying led to higher levels of public awareness and scrutiny, prompting legislative action on environmental issues.
- In 2018/19, AMAZON competed for public subsidies, using its political and economic clout to agree on $3bn from the New York State and City governments to build a second headquarters there, triggering huge public/media backlash from taxpayers that had no say in the deal.
- Amazon ended up WITHDRAWING from New York, showing how public resistance can influence how much rich corporations would seek to typically extract from governments.
15
Q
Public Scrutiny - Politicians - BIDU
A
- Further, politicians may avoid BLATANT rent transfers to avoid electoral punishment, linking to dynamic accountability.
- This is because politicians often do not simply care about being elected/ supported in the IMMEDIATE moment but often bank on being chosen in the future and therefore do not want to be seen overtly paying for market power.
- This DYNAMIC accountability of politicians can prevent blatant rent-seeking, as seen in the UK MPs Expenses Scandal (2009) where MPs were caught over-claiming expenses, sparking public outrage and resignations. Politicians avoid large and obvious rent transfers due to long-term reputation risk as they also care about future reelection and political capital, rather than solely rent.
16
Q
Conclusion - DRDLAI
A
- Tullock gives a powerful DIAGNOSIS of political inefficiency: rent-seeking explains why bad policies persist, serving narrow, organised interests even if all actors are not strategically maximising their self-interest.
- REAL-world rent-seeking involves networks of informal relationships, information asymmetry, and institutional complexity.
- Tullock’s framework crucially exposed how rent-seeking DISTORTS markets and governance, rewarding political influence over productivity.
- LOW dissipation levels can be explained by strategic, political, and institutional factors both embedded and outside the system.
- ACEMOGLU and Robinson clarify why some systems institutionalise rent-seeking while others suppress it: the nature of political institutions determines whether rent-seeking is contained or incentivised.
- Understanding rent-seeking thus requires not only economic logic but INSTITUTIONAL context. Where institutions are extractive, rent-seeking becomes a feature, not a bug.
