American Economic Association

The Political Economy of the Rent-Seeking Society

Author(s): Anne O. Krueger
Source: The American Economic Review, Vol. 64, No. 3 (Jun., 1974), pp. 291-303
Published by: American Economic Association
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 the Political Economy of the Rent-
Seeking Society
BY ANNE 0. KRUEGER*

In many market-oriented economies, restrictions on trade is developed and the

government restrictions upon economic propositions indicated above are estab-
activity are pervasive facts of life. These lished. A final section outlines some other
restrictions give rise to rents of a variety forms of rent seeking and suggests some
of forms, and people often compete for implications of the analysis.
the rents. Sometimes, such competition is
1. Competitive Rent Seeking
perfectly legal. In other instances, rent
seeking takes other forms, such as bribery, A. Means of Competition
corruption, smuggling, and black markets. When quantitative restrictions are im-
It is the purpose of this paper to show posed upon and effectively constrain im-
some of the ways in which rent seeking is ports, an import license is a valuable com-
competitive, and to develop a simple modity. It is well known that under some
model of competitive rent seeking for circumstances, one can estimate the tariff
the important case when rents originate equivalents of a set of quantitative re-
from quantitative restrictions upon inter- strictions and analyze the effects of those
national trade. In such a case 1) competi- restrictions in the same manner as one
tive rent seeking leads to the operation would the tariff equivalents. In other cir-
of the economy inside its transformation cumstances, the resource-allocational ef-
curve; 2) the welfare loss associated with fects of import licensing will vary, de-
quantitative restrictions is unequivocally pending upon who receives the license.1
greater than the loss from the tariff It has always been recognized that there
equivalent of those quantitative restric- are some costs associated with licensing:
tions; and 3) competitive rent seeking paperwork, the time spent by entrepre-
results in a divergence between the private neurs in obtaining their licenses, the cost
and social costs of certain activities. Al- of the administrative apparatus necessary
though the analysis is general, the model
to issue licenses, and so on. Here, the argu-
has particular applicability for develop-
ment is carried one step further: in many
ing countries, where government interven- circumstances resources are devoted to
tions are frequently all-embracing.
competing for those licenses.
A preliminary section of the paper is The consequences of that rent seeking
concerned with the competitive nature of
are examined below. First, however, it will
rent seeking and the quantitative impor-
be argued that rent-seeking activities are
tance of rents for two countries, India and
often competitive and resources are de-
Turkey. In the second section, a formal voted to competing for rents. It is difficult,
model of rent seeking under quantitative
if not impossible, to find empirically ob-
servable measures of the degree to which
* Professor of economics, University of Minnesota.
I am indebted to James M. Henderson for invaluable
rent seeking is competitive. Instead, some
adlvice and discussion on successive clrafts. Jagdish
Bhagwati and John C. Hause made helpful comments I This phenomenon is explored in dletail in Bhag,wati
on earlier drafts of this paper. and Krueger.

291

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292 THE AMERICAN ECONOMIC REVIEW JUNE 1974

mechanisms under which rent seeking is is generally free into importing-whole-

almost certain to be competitive are saling, and firms usually have U-shaped
examined. Then other cases are considered cost curves. The result is a larger-than-
in which it is less obvious, but perhaps optimal number of firms, operating on the
equally plausible, that competition results. downward sloping portion of their cost
Consider first the results of an import- curves, yet earning a "normal" rate of
licensing mechanism when licenses for return. Each importer-wholesaler receives
imports of intermediate goods are allo- fewer imports than he would buy at exist-
cated in proportion to firms' capacities. ing prices in the absence of licensing, but
That system is frequently used, and has realizes a sufficient return on those licenses
been analyzed for the Indian case by he does receive to make it profitable to
Jagdish Bhagwati and Padma Desai. stay in business. In this case, competition
When licenses are allocated in proportion for rents occurs through entry into the
to firms' capacities, investment in addi- industry with smaller-than-optimally sized
tional physical plant confers upon the firms, and resources are used in that the
investor a higher expected receipt of im- same volume of imports could be efficiently
port licenses. Even with initial excess distributcl with fewer inputs if firms were
capacity (due to quantitative restrictions of optimal size.
upon imports of intermediate goods), a A third sort of licensing mechanisnm is
rational entrepreneur may still expand his less systematic in that government officials
plant if the expected gains from the addi- decide on licenise allocations. Competition
tional import licenses he will receive, occurs to some extent through both mecha-
divided by the cost of the investment, nisms already mentioned as businessmen
equal the returns on investment in other base their decisions on expectecl values.
activities.2 T his behavior could be perfect- But, in addition, competition can also
ly rational even if, for all entrepreneurs, occur through allocating resources to
the total number of import licenses will influencing the probability, or expected
remain fixed. In fact, if imports are held size, of license allocations. Some means of
constant as domestic income grows, one influencing the expected allocation--trips
would expect the domestic value of a con- to the capital city, locating the firm in the
stant quantity of imports to increase over capital, and so on are straightforward.
time, and hence installed capacity would Others, including bribery, hiring relatives
increase while output remained constant. of officials or employing the officials them-
By investing in additional capacity, en- selves upon retirement, are less so. In the
trepreneurs devote resources to compete former case, competition occurs through
for import licenses. choice of location, expenditure of resources
A second sort of licensing mechanism upon travel, and so on. In the latter case,
frequently found in dleveloping countries government officials themselves receive
is used for imports of consumer goods. part of the rents.
TFhere, licenses are allocated pro rata in Bribery has often been treated as a
transfer
proportion to the applications for those payment. However, there is com-
licenses from importers-wholesalers. Entry petition for government jobs and it is
reasonable to believe that expected total
2 Note that 1p) ooe wooll ex1)ect to t1n(d greater ex-
cess cal)acity in those ioi(lustries where rents are higher; remuneration is the relevant decision vari-
ani(1 2) within an industry, more elficient. firns will have able for persons deciding upon careers.
,greater excess ca})acity thani less efflicienit tirms, since
the retuLrni on a given amiiounit of investment xxili l)e
Generally, entry into governmenit service
higher with greater eftfiieCiCV. requires above-average educationial at-

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VOL. 64 NO. 3 KRUEGER: RENT-SEEKING SOCIETY 293

tainments. The human capital literature will be competitive.3 In most cases, people
provides evidence that choices as to how do not perceive themselves to be rent
much to invest in human capital are seekers and, generally speaking, individ-
strongly influenced by rates of return upon uals and firms do not specialize in rent
the investment. For a given level of educa- seeking. Rather, rent seeking is one part
tional attainment, one would expect the of an economic activity, such as distribu-
rate of return to be approximately equated tion or production, and part of the firm's
among various lines of endeavor. Thus, if resources are devoted to the activity (in-
there appear to be high official-plus- cluding, of course, the hiring of expe-
unofficial incomes accruing to government diters). The fact that rent seeking and
officials and higher education is a pre- other economic activities are not generally
requisite for seeking a government job, conducted by separate economic entities
more individuals will invest in higher edu- provides the motivation for the form of
cation. It is not necessary that govern- the model developed below.
ment officials earn the same total income
B. Are Rcnts Quiantitatively Iniportantut
as other college graduates. All that is
necessary is that there is an excess supply Granted that rent seeking may be highly
of persons seeking government employ- competitive, the question remains whether
ment, or that highly educated persons rents are important. Data from two coun-
make sustained efforts to enter govern- tries, India and Turkey, suggest that they
ment services. Competition takes place are. Gunnar Myrdal believes India may
through attaining the appropriate creden- . . . on the balance, be judged to have
tials for entry into government service somewhat less corruption than any other
and through accepting unemployment country in South Asia" (p. 943). Nonethe-
while making efforts to obtain appoint- less, it is generally believed that "corrup-
ments. Efforts to influence those in charge tion" has been increasing, and that much
of making appointments, of course, just of the blame lies with the proliferation of
carry the argument one step further back. economic controls following independ-
To argue that competition for entry ence.4
into government service is, in part, a Table 1 presents crude estimates, based
competition for rents does not imply that on fairly conservative assumptions of the
all government servants accept bribes nor value of rents of all sorts in 1964. One im-
that they would leave government service portant source of rents -investment licen-
in their absence. Successful competitors sing--is not included for lack of any valid
for government jobs might experience large basis on which to estimate its value. Many
windfall gains even at their official salaries. smaller controls are also excluded. None-
However, if the possibility of those gains theless, it is apparent from Table 1 that
induces others to expend time, energy, and
resources in seeking entry into govern- It may- I e ol)jecte(l that illegal means of competition
may l)e sufficienitlx dlistasteful that lperfect coml)etition
ment services, the activity is competitive Nvill not result. I'hree comments are calle(d for. First, it
for present purposes. reqjuires only that, enough people at, the margin do not
In all these license-allocation cases, there incur disutilitv from engaging in these activities. Second.
most lines of economic activity in many countries can-
are means, legal and illegal, for competing not. he entered w ithout some rent-seeking activitv.
for rents. If individuals choose their Third, risks of dletection (especially when hriherv is ex-
pecte(l) and(i
activities on the basis of expected returns, the value judgments associatedl with illegal
activities (liffer from society to society. See IRonal(d
rates of return on alternative activities
Wraith and( 1Edgar Simpkins.
will be equated and, in that sense, markets Santhanami Committee, pp. 7--8.

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294 THE AMERICAN ECONOMIC REVIEW JUNE 1974

TABLE 1 ESTIATES OF VALUE OF RENTS: INDIA, 1964 income of Rs. 201 billion in 1964. At 7.3
percent of national income, rents must be
Amount of Rent
Source of Rent (Rs. million)
judged large relative to India's problems
in attempting to raise her savings rate.
I)ublic investment 365 For Turkey, excellent detailed estimates
Imports 10,271
Controlled commodities 3,000 of the value of import licenses in 1968 are
Credit rationing 407 available.5 Data on the c.i.f. prices of
Railwavs 602
individual imports, their landed cost (c.i.f.
Total 14, 645 price plus all duties, taxes, and landing
charges), and wholesale prices were col-
Soatrces: lected for a sizeable sample of commodities
1) Public investment: The Santhanam Committee,
representing about 10 percent of total
pp. 11-12, l)laced the loss in public investment at
at least 5 p)ercent of investment. That figure was multi- imports in 1968. The c.i.f. value of imports
plied by the average annual public investment in the in the sample was TI, 547 million and the
Tlird Fiz,e Year Plain.
2) Imports: The Santhanam Committee, l) 18,
landed cost of the imports was TL 1,443
statedl that import licenses were worth 100 tomillion. The value at the wholesale level
500 lper-
cent of their face value. Seventy-five percent of the of these same imports was T'L 3,568
value of 1964 iml)orts was used here as a conservative
estimate.
million. Of course, wholesalers incur some
3) Controlled commodities: These commodities in- handling, storage, and transport costs.
clude steel, cement, coal, passenger cars, scooters, food, The question, therefore, is the amount
and other price-and/or distribution-controlled com-
modities, as well as foreign exchange used for illegal
that can be attributed to normal whole-
imports and other unrecorded transactions. The figure saling costs. If one assumes that a 50 per-
is the lower bound estimate given by John Monteiro, cent markup would be adequate, then the
p. 60. Monteiro puts the upper bound estimate at Rs.
30,000 billion, although he rejects the figure on the
value of import licenses was TL 1,404
(dubious) ground that notes in circulation are less than million, or almost three times the c.i.f.
that sum. value of imports. Imports in 1968 were
4) Credit rationing: The bank rate in 1964 was 6 per-
cent; Rs. 20.3 billion of loans were outstanding. It is
recorded (c.i.f.) as 6 percent of national
assumed that at least an 8 percent interest rate would income. On the basis of Aker's data, this
have been required to clear the market, and that 3 per- would imply that rents from import li-
cent of bank loans outstanding would be equivalent to
the present value of new loans at 5 percent. Data
censes in Turkey in 1968 were about 15
source: Reserve Bank of India, Tables 534 and 554. percent of GNP.
5) Railways: Monteiro, p. 45, cites commissions of
Both the Indian and the Turkish esti-
20 percent on railway purchases, and extra-official fees
of Rs. 0.15 per wagon and Rs. 1.4 per 100 maunds mates are necessarily somewhat rough.
loaded. These figures were multiplied by the 1964 traffic But they clearly indicate that the value
volume; 203 million tons of revenue-paying traffic
of import licenses to the recipients was
originated in that y-ear. Third plan expenditure on
railroads was Rs. 13,260 million. There were 350,000 sizeable. Since means were available of
railroad goods wagons in 1964-65. If a wagon was competing for the licenses, it would be
loaded once a week, there were 17,500,000 wagons of
surprising if competition did not occur for
freight. At Rs. 0.15 per load, this would be Rs. 2.6 mil-
lion; 100 maunds equal 8,228 pounds so at 1.4 Rs. per prizes that large. We turn, therefore, to
100 maun(ls, Rs. 69 million changed hands; if one-fifth an examination of the consequences of
of railroa(l expenditures were made in 1964-65, Rs. 2652
competitive rent seeking.
million was spent in 1964; at 20 percent, this would be
Rs. 530 million, for a total of Rs. 602 million.

import licenses provided the largest source 5 am indebted to Ahmet Aker of Robert College who
kindly made his data available to me. Details and a
of rents. The total value of rents of Rs.
description of the data can be found in mv forthcoming
14.6 billion contrasts with Indian national book.

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 VOL. 64 NO. 3 KRUEGER: RENT-SEEKING SOCIETY 295

II. The Effects of Competitive product of labor in agriculture, due, pre-

Rent Seeking sumably, to fixity in the supply of land.
Ihe major proposition of this paper is The level of distribution output, D, is
that competitive rent seeking for import defined to equal the level of consumption-
licenses entails a welfare cost in addition goods imports, M:
to the welfare cost that would be incurred
(2) D=M
if the same level of imports were achieved
through tariffs. The effects of tariffs upon One unit of distributive services entails
production, trade, and welfare are well exchanging one unit of imports for food
known, and attention is focussed here up- with the agricultural sector at the domestic
on the additional cost of competitive rent terms of trade, and exporting the food in
seeking. A simple model is used to de- exchange for imports at the international
velop the argument. Initially, free trade is terms of trade. Constant returns to scale
assumed. Then, a tariff or equivalent im- are assumed for the distribution activity;
port restriction is introduced. Finally, an one unit of distribution requires k units of
equal import restriction with competitive labor. Total labor employed in distribu-
rent seeking is examined. tion, LD, is

(3) LD= kD
A. The Basic Model
Two commodities are consumed by the A distribution charge of PD per unit is
country under investigation: food and added to the international price of im-
consumption goods. Food is produced ports:
domestically and exported. Consumption
(4) P , = I + PD
goods are imported. Distribution is a pro-
ductive activity whereby food is purchased where pal is the domestic p
from the agricultural sector, exported, and The domestic price of food is assumed to
the proceeds are used to import consump- equal its unit international price.7
tion goods which are sold in the domestic Society's demand for imports depends
market. Labor is assumed to be the only upon the domestic price of imports and
domestic factor of production.' It is as- total income generated in agriculture:8
sumed that the country under considera-
(5) M = M(PM, A)
tion is small and cannot affect its inter-
national terms of trade. Physical units are where 3M &PM<0 and &M1/3A
selected so that the fixed international mand decreases with increases in the price
prices of both goods are unity. of imports, and increases with increases in
The agricultural production function is agricultural output (income). Equation
(5) is derived from micro utility maximiza-
(1) A = A(LA) A' > O, A" < O tion with the assumption that farmers,
where A is the output of food and LA is distributors, and rent seekers all have the
the quantity of labor employed in agri- same consumption behavior. Domestic
culture. The sign of the second derivative
7 These assumptions establish a domestic numeraire.
reflects a diminishing marginal physical
The real analysis would be unaffected by proportional
changes in the domestic prices.
6 Labor could be regarded as a composite domestic
8 Food and imports are consumed. But, by choice of
factor of production. Extensions to two or more factors food as the numeraire (see equation (6)) and the as-
would complicate the analysis, but would not alter its sumed constancy of international prices, agricultural
basic results. output serves as a measure of income.

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296 THE AMERICAN ECONOMIC REVIEW JUNE 1974

food consumption, F, is simply the quan- since A " < 0, which follows from diminish-
tity not exported: ing returns in food production. Substitut-
ing from (8) into (9),
(6) F = A-M
- (IF
Since the fixed international terms of trade t 1 + PD
equal unity, food exports equal consump- (lM
tion goods imports.
Finally, it is assumed that the economy which establishes the aforementioned eqjual-
ity.
under consideration has a fixed labor sup-
A free-trade solution is depicted in
ply, L:
Figure 1. Domestic food consumption and
(7) L = LA + LI) + L1I? import consumption are measured along
OF and OM, respectively. The consump-
where LR is the quantity of labor engaged
tion possibility locus is P '. At the point F
in rent seeking.
no imports are consumed and hence there
B. Free Tradc is no distribution. If distribution were cost-

Under free trade, there is free entry into less, society could choose its consumption
both agriculture and (listribution and com- point from the line fA. However, to con-
sume one unit of import requires exchang-
petition equates the wage in the two ac-
tivities: ing one unit of food and withdrawing k
workers from agriculture to provide the
(8) A' = pD/k requisite distributive services. With di-
Equations (1) to (8) constitute the free- minishing marginal product of labor in
trade system. These eight equations con- agriculture, the cost of additional imports
tain the eight variables A, M, D, F, LA, in terms of foregone foodI production rises.
LD, Pm, and PD- Since there is no rent Ihus,
seek-the price of distribution, and hence
ing under free trade, LR-O. the domestic price of imports, increases in
It is easily established that free trade is moving northwest from P. Ihe consump-
optimal in the sense that the domestic
price ratio under free trade equals the M

marginal rate of transformation between A

food consumption and imports. The con-
sumption possibility locus is obtained by
substituting into (6) from (1) and (7)

F = A(L - kMA) - -A

The locus has a marginal rate of trans-

formation greater than one: M

- (F
(9) -- = kA' + 1 > 1

which reflects the positive distribution cost

of substituting imports for food consump-
tion. Tlhe locus is concave:

(P2F 0 B E G f F
__= k2 1" < 0
(1M2 FIGURE 1. IREE TRADE

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VOL. 64 NO. 3 KRUEGER: RENT-SEEKING SOCIETY 297

tion point AM has OB food exchanged for M

OM of imports. 'I'he distance FB is the

A
agricultural output foregone to distribute
OM imports.
If society's preferences are given by the
in(lifference curve ii, point C is optimal.
'I'he price of distributioni is reflected in the
difference between the slope of FA and the
slope of DD at C. At the point C, OG food
would be prodluced, with EG (=EC) ex-
ported, and the rest domestically con- D''

sumed.

C. A Tariff or an Import Restriction

Without Rent Secking

Consider now a case in which there is a

restriction upon the quantity of imports 0 H J F F

(10) M = M1 FIGURE 2. IMPORT RESTRTCTI()N

WITITOUT RENT SEERING
where M is less than the import quantity
that wouldl be realizedl under free trade.
and a quantitative restriction are equiva-
Since entry into (listribution is now lim-
lent9 aside from the resultant income dis-
ited, the competitive wage equality (8)
tribution. Under a quantitative restriction
will no longer holdl. 'I'he relevant system
the distributive wage is higher than the
contains (1) to (7) and (10). The variables
agricultural. If instead there were an
are the same as in the free-trade case and
equivalent tariff with redistribution of the
again Lu 0=. T'he system may be solved
proceeds, the marginal product of labor
sequentially: given (10), D follows from
in agriculture would be unchanged, but
(2), 1, from (3), LA from (7), A from (1),
agricultural workers would benefit by the
F from (6), Pm from (5), and PD from (4).
amount of tariff proceeds redistributed to
Since equations (1), (6), and (7) remain
them whereas traders' income would be
intact, the solution for this case is also on
lower. Since the allocation of labor under
the consumption possibility locus.
a tariff and quantitative restriction with-
It is useful to establish the directions of
out rent seeking is the same and domestic
change for the variables following a switch
prices are the same, the only difference
from free trade to import restriction. The
between the two situations lies in income
reduced import level will reduce the labor
distribution.
employed in distribution and increase the
The solution under a quantitative re-
labor force in agriculture. Diminishing
striction is illustrated in Figure 2, where
returns will reduce the agricultural wage.
FA[ is again the consumption possibility
The domestic price of imports, the dis-
locus and C the free-trade solution. With
tributive margin, and the wage of distribu-
a quantitative restriction on imports in
tors will increase. Distributors will earn
the amount 0M, the domestic prices of
a rent in the sense that their wage will ex-
ceed the wage of those engaged in agricul-
I The change in the price of the import from the free-
ture. trade solution is the tariff equivalent of the quantitative
In the absence of rent seeking, a tariff restriction described here.

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298 THE AMERICAN ECONOMIC REVIEW JUNE 1974

imports, and hence of distribution, rise distributive markup, the more likely it is
from free trade to import restriction. Food that the distributors' total income will in-
output (OJ) and domestic consumption of crease with a curtailment of imports. The
food increase, and exports decline to HJ reason is that an increase in the domestic
(= OM). The indifference curve i'i' lies price of imports results in a proportion-
below ii (and the point C), and the welfare ately greater increase in the price of dis-
loss may be described by the consumption tribution.
and production cost measure given by
Harry Johnson. D. An Import Restriction with
The wage rate in distribution unequiv-
Competitive Rent Seeking

ocally rises for a movement from free In the import-restriction model just
trade to a quantitative restriction. The presented, the wage in distribution pDlk
total income of distributors will increase, exceeds the wage in agriculture A'. Under
decrease, or remain unchanged depending this circumstance, it would be surprising
upon whether the proportionate increase if people did not endeavor to enter distri-
in PD is greater than, less than, or equal to bution in response to its higher return.
the absolute value of the proportionate Resources can be devoted to rent seeking
decrease of imports. For the moment, let in all the ways indicated in Section IA.
PD, PMI, and M represent free-trade solu- This rent-seeking activity can be specified
tion values, and let pI), p* , and Al repre- in a number of different ways. A simple
sent import-restriction solution values. and intuitively plausible specification is
The total arc elasticity of demand for that people will seek distributive rents
imports for the interval under considera- until the average wage in distribution and
tion, e, is rent seeking equals the agricultural wage:"
_ ~~~*

(11) 1 - (M M) PM + P3II (13) A' =

pDM

M7 +M A P<j PM LD + LR

One can regard all distributors and rent

Total expenditures on imports will in-
seekers as being partially engaged in each
crease, decrease, or remain unchanged as
activity or one can think of rent seekers as
,q is less than one, greater than one, or entering in the expectation of receiving
equal to one. The total income of distribu-
import licenses. In the latter case, the
tors will increase if
final solution classifies the successful seek-
ers in LD and the unsuccessful ones in LR.
PDM > PDM
Equation (13) implies risk neutrality in
Multiplying both sides of this inequality this circumstance.
by (P* +PmI) (Pr -pv), substituting from
The model for import restriction with
(11), and using (4), rent seeking contains the same equations,

(12) 1 + 2/(PD + PD) > 11 As an alternative, the distributive production func-

tion (3) can be altered to treat all persons competing for
Hence, distributors' total income can in- import licenses as distributors so that LI) also encom-
crease even if the demand for imports is passes LR and A'=p,,.ll/L,. Another alternative is to
introduce a rent-seeking activity distinct from distri-
price elastic.'0 The smaller is the free-trade
bution with a wage determined from total rents
(po)-A 'k)M/LR, and require that this wage equal the
wages in distribution and agriculture. These specifica-
1l Proof of (12) uses the step that P*DiI > pDJA iml)lies
(A*-Po)/(p*+ p,) >-( > l-M)- / lI +M). Note that tionls give results equivalent to those that follow
in the continuous case, (12) reduces to I+ l/pD>-q. from (13).

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VOL. 64 NO. 3 KRUEGER: RENT-SEEKING SOCIETY 299

(1) to (7) and (10), and the same variables rent seeking. Equation (13) serves to de-
as the model for import restrictions with- termine particular values for LR and other
out rent seeking. In addition, the new variables of the system. The mere exis-
model contains (13) and the introduction tence of competitive rent seeking is enough
of LR as a variable. The essential factor to determine the directions of change of
of rent seeking is that LB beconmes positive.
the variables.
Let us start with a solution for an im- The above results are sufficient to indi-
port restriction without rent seeking and cate that, for any given level of import
ask what happens to the values of the restrictions, competition among rent seek-
variables when rent seeking is introduced. ers is clearly inferior to the tariff equiva-
By assumption AI= M is unchanged, so lent of the restrictions, in that there could
that LD is unchanged. Therefore, dL,1 be more food consumed with no fewer
= -dLR, because the labor that enters imports under the latter case than the
rent seeking can only come from agricul- former. To the extent that rent seeking is
ture. Substituting into the total differ- competitive, the welfare cost of import
ential of (1) and using (6), restrictions is equal to the welfare cost of
the tariff equivalent plus the additional
(14) t(F = (IA = - A'dLR < 0
cost of rent-seeking activities. Measurement
Agricultural production and food con- of that excess cost is considered below.
sumption are reduced by the introduction The tariff-equivalent and rent-seeking
of rent seeking. Since the import level re- equilibria are contrasted in Figure 3.
mains unchanged, rent seeking entails a Equilibrium under rent seeking will be
welfare loss beyond that for an import at some point such as L, with the same
restriction without rent seeking. The con- consumption of imports, but smaller pro-
cavity of the agricultural production func- duction and consumption of food than
tion results in a food loss that is less than occurs under a tariff. The points K and C
proportional to decrements in LA. Differ- are the tariff-equivalent and free-trade
entiating (5) totally, equilibria, respectively. The line D'D' cor-

(15) 0 = M1dpi-I + Md,(IA M

where M1 and M, are the partial deriva-

tives of (5) with respect to pmr and A,
respectively. Solving (15) for dpM,, and
substituting from (4) and (14),

M.
(16) (IPD = (Ipr = - A (ILR < 0

since M1 < 0 and M2 >0. The domestic

cost of imports will be lower under rent-
seeking competition. This follows from
D D}
the decrease in the consumption of food
M?~~~~~~~~~~~K
relative to imports.
The results of (14) and (16) are not de- \ \D D
pendent upon the particular form of the
equilibrium of the labor market. They 0 P N F F

hold for any specification of competitive 1"IGURE 3. RENT-SEEKING I. PORT RESTRICTION

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300 THE AMERICAN ECONOMIC REVIEW JUNE 1974

responds to the domestic price of imports E. Measuring the Welfare Loss from
in Figure 2, and the steeper line D"D" Rent Seeking
corresponds to the lower domestic price
A tariff has both production and con-
of imports under competitive rent seeking.
sumption costs, and it has already been
So far, it has been shown that for any
shown that rent seeking entails costs in
given level of import restriction, a tariff is
addition to those of a tariff. Many forms
Pareto-superior to competitive rent seek-
of competition for rents, however, are by
ing, and the properties of rent-seeking
their nature difficult to observe and quan-
equilibrium have been contrasted with
tify and one might therefore question the
those of the tariff-equivalent case in the
empirical content of the result so far ob-
absence of competition for the rents. A
tained.
natural question is whether anything can
Fortunately, there is a way to estimate
be said about the properties of rent-seeking
the production cost of rent seeking. That
equilibrium in contrast to those of a free-
cost, in fact, is equal to the value of the
trade equilibrium, which is, after all, the
rents. This can be shown as follows. The
optimal solution. It has been seen that the
rent per import license, r, is:
number of persons engaged in distribution
declines from free trade to import restric- (17) r = PD- kA'
tion without rent seeking, and increases as
This follows because the labor required to
one goes from that situation to competi-
distribute one unit of imports is k, which
tion for import licenses. Likewise, agri-
could be used in agriculture with a return
cultural output increases between free
A'. Note that at free trade r equals zero.
trade and the tariff-equivalent case, and
A distributor could efficiently distribute
declines between that and rent seeking.
an import and earn his opportunity cost in
'I'he cluestion is whether any unambiguous
agriculture with zero rent. The total value
signs can be place(l on the direction of
of rents, R, with competitive rent seeking
these changes between free trade and rent
is thus the rent per unit of imports times
seeking and, in particular, is it possible
the amount imported.
that society might pro(luce and consume
less of both goo(Is undler rent seeking than (18) R = rM = (PD- kA')AI
un(ler free trade?
Using (3) and (13),
'I'he answer is that if inequality (12)
is satistied, the absolute number of persons
(19) R (PD - PD+I i
(LJ,+LIJ) in (listribution will increase go-
ing from a free-trade to a rent-seeking
LD +
ecluilibrium. If import demandl is more ==bPD1- ITJ.11
elastic, the number of persons in distribu- V ILD + I-K)
tion will (lecline. Contrasted with a free- PDMILH
tra(le equilibrium, there would be less
14 + L,?
agricultural output and fewer imports
Thus the total value of rents reflects the
when inieqjuality (12) hol(ds. If, with import
restriction, the income from distribution agricultural wage (A') times the number
pDAf is greater than (listributors' incomeof rent seekers.
at free trade, more persons will be em- Tl he value of rents reflects the value (at
ploye(d in distribution-cum-rent seeking current prices) of the domestic factors of
with import restriction than are employed production which could be extracted from
under free trade. the economy with no change in the final

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VOL. 64 NO. 3 KREUGER: RENT-SEEKING SOCIETY 301

goods and services available for society's lent) and the volume of imports of each
utilization. Thus, if the value of rents is item.12 Third, it has generally been ac-
known, it indicates the volume of re- cepted that the more inelastic domestic
sources that could be transferred out of dis- demand the less is likely to be the welfare
tribution and into other activities, with cost of a given tariff. For the quota-cum-
no loss of distributive services from an rents case, the opposite is true: the more
initial position of rent-seeking activity. price inelastic is demand, the greater will
The estimates of rents in India and Tur- be the value of rents and the greater, there-
key, therefore, may be interpreted as the fore, the deadweight loss associated with
deadweight loss from quantitative restric- rent seeking. Fourth, it is usually believed
tions in addition to the welfare cost of that competition among importers will
their associated tariff equivalents if one result in a better allocation of resources
believes that there is competition for the than will a monopoly. If rent seeking is a
rents. possibility, however, creating a monopoly
The value of the rents overstates the position for one importer will generally
increase in food output and consumption result in a higher real income if not in a
that could be attained with a tariff to the preferable income distribution for society.
extent that the marginal product of labor Finally, devaluation under quantitative
in agriculture is diminishing, since the restrictions may have important alloca-
equilibrium wage will rise between the tion effects because it diminishes the value
tariff and the competitive rent-seeking of import licenses, and hence the amount
situation. In the case of a constant margi- of rent-seeking activity, in addition to its
nal product of labor in alternative uses, effects upon exports.
the value of rents will exactly measure
foregone output. III. Conclusions and Implications

In this paper, focus has been on the

F. The Implications of Rent Seeking
effects of competition for import licenses
for Trade Theory
under a quantitative restriction of im-
Recognition of the fact of rent seeking ports. Empirical evidence suggests that
alters a variety of conclusions normally the value of rents associated with import
obtained in the trade literature and exami- licenses can be relatively large, and it has
nation of such cases is well beyond the been shown that the welfare cost of quanti-
scope of this paper. A few immediately tative restrictions equals that of their
derivable results are worth brief mention, tariff equivalents plus the value of the
however.
rents.
First, an import prohibition might be
While import licenses constitute a large
preferable to a nonprohibitive quota if and visible rent resulting from govern-
there is competition for licenses under the
ment intervention, the phenomenon of
quota. This follows immediately from the rent seeking is far more general. Fair trade
fact that a prohibition would release re-
laws result in firms of less-than-optimal
sources from rent seeking and the excess
size. Minimum wage legislation generates
cost of domestic production might be less
equilibrium levels of unemployment above
than the value of the rents. Second, one
the optimum with associated deadweight
could not, in general, rank the tariff- losses, as shown by John Harris and
equivalents of two (or more) quotas, since
the value of rents is a function of both the 12 I am indebted to Bhagwati for pointing out this
amount of rent per unit (the tariff equiva- implication.

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302 THE AMERICAN ECONOMIC REVIEW JUNE 1974

Michael Todaro, and Todaro. Ceilings on been that high incomes reflect at least to
interest rates and consequent credit ra- some degree-high social product. As such,
tioning lead to competition for loans and the high American per capita income is
deposits and/or high-cost banking opera- seen as a result of a relatively free market
tions. Regulating taxi fares affects the mechanism and an unequal distribution is
average waiting time for a taxi and the tolerated as a by-product. If, instead, it is
percent of time taxis are idle, but prob- believed that few businesses would survive
ably not their owners' incomes, unless without exerting "influence," even if only
taxis are also licensed. Capital gains tax to bribe government officials to do what
treatment results in overbuilding of apart- they ought in any event to do, it is difficult
ments and uneconomic oil exploration. to associate pecuniary rewards with social
And so on. product. The perception of the price sys-
Each of these and other interventions tem as a mechanism rewarding the rich
lead people to compete for the rents al- and well-connected may also be important
though the competitors often do not per- in influencing political decisions about
ceive themselves as such. In each case economic policy. If the market mecha-
there is a deadweight loss associated with nism is suspect, the inevitable temptation
that competition over and above the tradi- is to resort to greater and greater interven-
tional triangle. In general, prevention of tion, thereby increasing the amount of
that loss can be achieved only by restrict- economic activity devoted to rent seeking.
ing entry into the activity for which a rent As such, a political "vicious circle" may
has been created. develop. People perVeive that the market
That, in turn, has political implications. mechanism does not function in a way
First, even if they can limit competition compatible with socially approved goals
for the rents, governments which consider because of competitive rent seeking. A
they must impose restrictions are caught political consensus therefore emerges to
on the horns of a dilemma: if they do re- intervene further in the market, rent seek-
strict entry, they are clearly "showing ing increases, and further intervention
favoritism" to one group in society and are results. While it is beyond the competence
choosing an unequal distribution of in- of an economist to evaluate the political
come. If, instead, competition for the rents impact of rent seeking, the suspicion of the
is allowed (or cannot be prevented), in- market mechanism so frequently voiced
come distribution may be less unequal and in some developing countries may result
certainly there will be less appearance of from it.
favoring special groups, although the eco- Finally, all market economies have some
nomic costs associated with quantitative rent-generating restrictions. One can con-
restrictions will be higher. ceive of a continuum between a system
Second, the existence of rent seeking of no restrictions and a perfectly restricted
surely affects people's perception of the system. With no restrictions, entrepre-
economic system. If income distribution is neurs would seek to achieve windfall gains
viewed as the outcome of a lottery where by adopting new technology, anticipating
wealthy individuals are successful (or market shifts correctly, and so on. With
lucky) rent seekers, whereas the poor are perfect restrictions, regulations would be
those precluded from or unsuccessful in so all-pervasive that rent seeking would
rent seeking, the market mechanism is be the only route to gain. In such a system,
bound to be suspect. In the United States, entrepreneurs would devote all their time
rightly or wrongly, societal consensus has and resources to capturing windfall rents.

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VOL. 64 NO. 3 KREUGER: RENT-SEEKING SOCIETY 303

While neither of these extreme types could Sector Analysis," Amer. Econ. Rev., Mar.
ever exist, one can perhaps ask whether 1970, 60, 126-42.
there might be some point along the con- H. G. Johnson, "The Cost of Protection and
tinuum beyond which the market fails to the Scientific Tariff," J. Polit. Econ., Aug.
1960, 68, 327-45.
perform its allocative function to any satis-
A. Krueger, Foreign Trade Reginmes and Eco-
factory degree. It will remain for further
nomic Development: Turkey, New York
work to formalize these conjectures and
1974.
to test their significance. It is hoped, how- J. B. Monteiro, Corruption, Bombay 1966.
ever, that enough has been said to stimu- G. Myrdal, Asian Drama, Vol. III, New York
late interest and research on the subject. 1968.
M. P. Todaro, "A Model of Labor Migration
REFEREiNCES and Urban Employment in Less Developed
Countries," Amer. Econ. Rev., Mar. 1969,
J. Bhagwati, "On the Equivalence of Tariffs 59, 138-48.
and Quotas," in his Trade, Tariffs and R. Wraith and E. Simpkins, Corruption in
Growth, London 1969. Developing Countries, London 1963.
and P. Desai, Planning for Industrial- Government of India, Planning Commission,
ization: A Study of India's Trade anid In- Third Five Year Plan, New Delhi, Aug.
dustrial Policies Since 1950, Cambridge 1961.
1970. Reserve Bank of India, Report on Currency
and A. Krueger, Foreign Trade Re- and Finance, 1967-68.
gimes and Economic Development: Experi- Santhanam Committee, Report on the Com-
ence and Analysis, New York forthcoming. mittee on Prevention of Corruption, Gov-
J. R. Harris and M. P. Todaro, "Migration, ernment of India, Ministry of Home Affairs,
Unemployment, and Development: A Two- New Delhi 1964.

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