Rent Seeking

IMF Working Papers, March 1, 2005

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This paper examines the relationship between rent seeking and economic performance when governments cannot enforce property rights.
With imperfect credit markets and a fixed cost of rent seeking, only wealthy agents choose to engage in it, since it enables them to protect their wealth from expropriation.
The level of rent seeking and economic performance are determined by the initial distribution of income and wealth.
When individuals also differ in their productivity, not all wealthy agents become rent seekers and the social costs of rent seeking are typically lower.
In both cases, multiple equilibria with different levels of rent seeking and production are possible.

Imperfect credit markets and a fixed cost of rent seeking create a wealth threshold: only wealthy agents undertake rent seeking to protect wealth from expropriation.
Initial distribution of income and wealth is a determinant of aggregate rent seeking and of aggregate economic performance.
Heterogeneity in productivity reduces the incidence of rent seeking among wealthy agents and lowers the social cost of rent seeking relative to the homogeneous-productivity case.
The model admits multiple equilibria with varying levels of rent seeking and production, implying path dependence of outcomes.

Property-rights enforcement limitations interact with financial market imperfections to shape incentives for rent seeking.
Distributional initial conditions (income and wealth) can produce persistent differences in economic outcomes through their effect on rent-seeking participation.
Productivity heterogeneity among agents moderates the aggregate welfare loss from rent seeking.