Analyse the distortions created by rent-seeking using Tullock’s framework and outline different ways to rationalise low-levels of rent dissipation.

Question 1

Tullock’s Framework - TEMUV

Answer 1

Tullock (1967) - analogy of THEFT…substantial social costs exist (e.g. home security, courts, etc) despite no direct loss of national product; rent-seeking involves a wasteful EXPENDITURE of resources
Rents are valuable, and MONOPOLISTS are willing to invest large amounts of money to get them… = to the rent itself
Krueger (1974) - diversion of resources to UNPRODUCTIVE rent-seeking is very large, and creates a VICIOUS cycle of increasing intervention and thus rent availability

Question 2

Emperical Evidence for the costs of rent-seeking - ITD

Answer 2

Krueger (1974) - INDIA lost 7.4% of national income to rent-seeking in 1964
Turkey lost 15% of GDP to rent-seeking in 1968
all in addition to DEADWEIGHT loss
Massive economic costs…can be truly ridiculous, e.g. creating excess, un-used capacity in factories purely to get licenses

Question 3

Tullock’s paradox - PMS

Answer 3

Rent-seeking is extremely PROFITABLE for firms (e.g. massive tax cuts secured by just a million in lobbying costs)…so why isn’t there MORE rent-seeking? i.e. actual rent dissipation falls far below theoretical behavior
Harmful because successful rent extraction with minimal cost STRENGTHENS incentives

Question 4

Explanation 1: suboptimal behavior - FAT

Answer 4

Stigler, and Peltzman (1976) - small-group dominance in the political process because of FREE-rider problem; interferes with perfect competition in collective rent-seeking…lobbying is dominated by small, powerful groups
ASSYMETRIC information, i.e. private information about costs/regulation, may not be readily available…part of lobbying may be to TRANSMIT information to politicians (Potter and van Winden, 1992)
Firms may not be acting optimally, and rents can be secured with less dissipation than is predicted in perfect competition

Question 5

Explanation 2: state capture - CICIB

Answer 5

Stigler (1971) - regulation can eventually become CAPTURED by corporations and operated primarily for the benefit of the INDUSTRY itself. Tolluck’s conception of a purely COMPETITIVE environment for rent-seeking may be flawed…industry capture of the regulatory process may limi competition, indtroducing INSTITUTIONAL constraints to cement the dominance of certain players
Peltzman (1976) - partial state capture; regulatory outcomes = shared spoils, even the losing ‘political entrepreneurs’

Question 6

Explanation 3: non-competitive lobbying - ACIC

Answer 6

Lobbying and rent-seeking may not be the competitive, non-beneficial thing that Tullock describes
Hall and Deardorff (2006) - interest rarely lobby non-aligned or even un-aligned politicans…lobbying is about assisting already ALIGNED legislators with their goals
In this case, rent-seeking is less COMPETITIVE because officials are not being bought/convinced
Potter and van Winden (1992) - lobbying is a form of INFORMATION exchange, where interests groups possess valuable private information that they want to transmit to politcians. Information transfer must be COSTLY to avoid cheap-talk.
This demonstrates that substantial information assymetries may exist that prevent 100% rent dissipation. Also questions how competitive the act of lobbying is.

Question 7

Conclusion

Answer 7

Tullock’s landmark contribution is to expand the understanding of the social cost of monopoly rents to include the cost of ‘rent-seeking’, which massively exceeds the deadweight loss of the welfare triangle. He predicts that interest groups will engage in equilibrium play when rent-seeking, leading to 100% disspation of the rent itself. In practice, this is not seen, which may be due to suboptimal behavior, state capture, and non-competitive lobbying.