Rent Oriented Behavior

In the general case, the concept of rent-oriented behavior implies making profit without participating in any productive activity, for example, by gaining control over a land plot or other natural resources or introducing legislative burdens in a certain area of ​​human activity.

Rent-oriented behavior is considered a negative phenomenon, entailing significant losses in public welfare .

Most studies of rent-oriented behavior focus on attempts to seize monopoly privileges, for example, state regulation of certain sectors of the economy, but the term itself goes back to the much more ancient and well-established practice of appropriating part of the income from economic activities of agents through ownership or control of the land on which this activity is carried out .

Other types of rent-seeking behavior are associated with attempts to redistribute wealth by shifting the tax burden to certain groups of economic agents or redistributing government spending .

Background

Criticizing David Ricardo , who examined land rent and revealed its differentiation depending on the quality of the land, Karl Marx divided it into two types of differential rent : differential rent of the first kind (arising from greater natural productivity (fertility) of a plot of land relative to the "marginal" land) and differential rent kind II (occurring at a higher productivity due to land owner investment in increasing fertility as compared to the same portion where invest s was not).

The theory was further developed in the works of Henry George , who believed that the value of land (and the amount of land rent) is largely determined by the production of public goods and infrastructure (for example, the construction of roads, public schools, the maintenance of law and order, and so on). and not just the activities of the owner. This situation allows owners to receive additional winnings (rents), demonstrating rent-oriented behavior. To stop it, Henry George proposed introducing a land tax that would completely remove the amount of rent in favor of the state.

Theory Appears

However, as a phenomenon, rent-seeking behavior was first described in 1967 in the work of Gordon Tullock ^[1] when analyzing monopoly markets. The English term “ rent seeking ” was introduced in 1974 by Ann Krueger ^[2] . Moreover, the word rent was used in the sense of the division of income by profit , wages, and land rents introduced by Adam Smith ^[3] .

With the economic behavior of agents focused on making a profit, additional value is generated due to mutually beneficial transactions between them (transactions), which entails an increase in public welfare ^[4] . In contrast, rent-seeking behavior occurs when a third party deprives one of the transaction participants of certain opportunities, transforming otherwise a mutually beneficial transaction into an instrument of receiving rent by the other side. In other words, rent-seeking behavior does not imply an increase in the welfare of agents, but only a redistribution of the existing one in someone else's favor.

At the same time, critics of the concept of rent-seeking behavior note that in practice it can be difficult to distinguish between profit-oriented and rent-oriented behavior of agents ^[5] .

Examples of Rent-Oriented Behavior

An often cited example of rent is the institution of licenses (medallions) for taxi drivers. To the extent that this measure limits the general offer (without considering the issues of ensuring competence and quality of service), the prohibition of taxi drivers who do not have medallions leads to the owners of the medallions receiving additional income from ordinary market transactions.

Rent-seeking behavior in the field of economic regulation often arises in the form of lobbying . A related concept is state capture , which refers to agreements between firms and government agencies designed to regulate their activities, which leads to increased opportunities for extracting rents, especially in situations where the agency relies on market information provided by the firm itself.

The concept of rent-seeking behavior is also applied to the description of corruption of officials demanding and receiving bribes for the use of authority granted to them at their own discretion ^[6] . An example is tax officials who receive bribes for lowering the tax burden on their clients.

From a theoretical point of view, rent-seeking behavior can lead to a significant risk of moral hazard . If the “purchase” of a favorable economic environment is cheaper than building a more efficient production, agents will choose the first opportunity, earning income not related to their contribution to the public welfare. This leads to a non-optimal allocation of resources - the cost of lobbying and counter-lobbying, instead of investing in research and development, improving business processes, professional development or additional capital benefits - which ultimately inhibits economic growth .

The rent-seeking behavior of corrupt government officials providing individuals or firms with special economic privileges may open up the possibility of exploiting other agents by them ^[7] . In particular, it is known that rent-seeking behavior of government officials can lead to higher prices for public goods ^[8] . It is also shown that rent-seeking behavior in tax authorities causes a decrease in budget revenues.

A number of economists believe that the tax system of the state should be reformed in such a way as to primarily return rents received by individuals from other agents (in particular, those related to land use and pollution), and not to impose a burden on agents engaged in productive economic activities.

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