Academic journal article The Journal of Philosophical Economics

The Welfare Costs of Rent-Seeking: A Methodologically Individualist and Subjectivist Revision

Academic journal article The Journal of Philosophical Economics

The Welfare Costs of Rent-Seeking: A Methodologically Individualist and Subjectivist Revision

Article excerpt

Introduction

Gordon TuUock is famous for Ms pioneering the concept of rente seeking (TuUock 1967) even though the term itseU is owed to Krueger (1974). TuUock's simple claim was this: previous economic analysis of monopoUes had argued that the aUocational rectangle was a mere transfer of wealth from one party to another wMch occasioned no loss to society (TuUock 1967: 225 in TuUock 2004: 170; TuUock 119871 2004: 237; TuUock 1998; TuUock 2003: 2). The oMy true social loss was the "Harberger triangle' of deadweight loss, whose magMtude was calcMated to he qMte small (TuUock 2003: 2f.). Therefore, the social cost of monopoUes was almost negUgible. TuUock 'simply sMfted attention from the welfare triangle to the profit rectangle and asked what seU-seeking entrepreneurs would do to access such a profit rectangle from the zero profit environment of a competitive market' (TuUock 1998). His answer was that the "TuUock rectangle' of transfer itseU occasioned social losses of Us own. Potential recipients of monopoly privilege or regulatory protection would invest resources in lobbying to obtain that protection, theoreticaUy investing up to the capitalized probabiUtydiscounted value of the potential protection to be obtained. Furthermore, potential victims of the monopoly would engage in a similar calculus, investing in counterlobbying, potentiaUy investing a value up to the capitalized cost wMch woMd he imposed on them. Potential beneficiaries and victims wiU invest to the point where expected marginal returns equal expected marginal costs. Thus rent-seeking is defined as the outiay of resources by individuals and organizations in the pursMt of rents created by government' (TuUock 1998). These investments in lobbying and counterlobbying resources are a pure social waste with no productive value to society and society loses not oMy the value of the Harberger triangle but also of the TuUock rectangle. In short, the coste of protectioMsm include not oMy the deadweight loss of the protection itseU, but also the value of aU the lobbying resources wMch are invested in securing and forestalling this protection. These investments in lobbying are of no productive value and constitute pure social waste.

Note that one cannot say that rente seeking is negative sum because investments are necessarily dupUcated. When multiple firms each invest in lobbying to secure a smgle privilege, oMy one firm can be successful, and aU the other firms wiU have wasted their investments. Perhaps it is this dupUcation wMch explains why rent-seeking reduces welfare. But in fact, each firm will invest not according to the maximum realizable rent obtainable but the rent discounted by the probability of its successful acquisition. Similarly, the potential victims of rent-seeking will invest in counter-lobbying, up to the cost being potentially imposed on them discounted by the probability of their counter-lobbying being successful In other words, the investment in lobbying (and counter-lobbying) is based not just on capitalized expectation of cost and benefit - because transfers are continual and not one-time - but also discounted by probability - because lobbying efforts have less than a guaranteed chance of success. The more firms competing for a single rent, the lower the probability any given firm will obtain it, and the less any one firm will be willing to invest Because this depends on expected not actual probabilities, we cannot predict a priori whether rent seeking investment will be efficiently based on correct estimations of probabilities. Ill But assuming probability estimations are unbiased and errors are random rather than systematic, we should expect that the probability-discount on investment will prevent the wasteful-duplication aspect of investment in obtaining rente. The total probability of obtaining the rent is equal to approximately 1 (100%), and so the total investment in lobbying by all firms collectively should tend to equal the total value of the rent, which each individual firm investing an amount equal to the rent discounted by that firm's individual probability of obtaining it Therefore, Tullock says (119871 2004: 239),

In almost all existing lotteries, of course, the total investment of resources by the gamblers is considerably greater than the total payoff, whereas here it is still assumed that the total resources committed to rent seeking equal the total monopoly profits. …

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