Rent-Seeking and Directly Unproductive Profit-Seeking Activities

Rent-Seeking Activities

Rent-seeking has been one of the most important concepts in the last fifty years of economics and, unfortunately, the most inappropriately labelled concept in economics. Gordon Tullock originated the idea in 1967, and Anne Krueger introduced the concept of labels in 1974.

In economics, people are said to be rent seekers when they obtain the benefit from themselves from their political area. Thus, rent-seeking in economics means to increase one share of existing wealth without generating new wealth.

According to Anne Kruger (Chapter 26 Rent Seeking pg 48), “Rent seeking is a resource using activity undertaken by individuals or groups from which they seek to profit but from which activity there will be no increase in output”.

According to (Pasour EC, “Rent seeking some conceptual problems and implications 1983 pg 1) “, “rent-seeking is an attempt to economic rent paid to a factor of production in excess of what is needed by manipulating the social or political environment in which economic activities occur rather than by creating new wealth”.

Thus, rent-seeking can be described as the activity of individuals and firms who accomplish to obtain wealth transfers with the help of the state. In rent-seeking activities, nothing specific and productive contribution is being made to the economy, but the rent seeker only works for his own self-interest, and he himself benefits from the rent-seeking activities by making certain manipulations in environmental conditions.

Various examples of rent-seeking activities are:

• Government Bailouts
• Piracy
• Lobbying the government
• Direct Income Transfers by the government.

Thus it can be concluded that rent-seeking activities never increase productivity nor it show an increase in the national value of the economy. It can be said that rent-seeking activities neither lead to the creation of wealth nor it benefit the economy. Thus, rent-seeking activities have a negative impact on society.

People use to seek rent because they want the benefit for themselves. They typically are engaged in such type of activities because they want a subsidy if they are manufacturing or producing any good or services. They want to acquire tariffs on the goods they are producing so as to hamper their competitors. Elderly people use to seek rent because they want higher social security payments. Thus, each and every person used to seek rent for his own self-interest.

Thus, rent-seeking is the use by a company or individual who wants to obtain economical gain from others without giving any benefit to society through wealth creation.

Directly Unproductive Profit-Seeking (DUP) Activities

There is one more type of activity which occupies a very important place in economics. These activities are known as directly unproductive profit-seeking activities. This term was coined by Bhagwati in 1982.

He said that these are those activities which have no direct productive purpose, nor have they not increased any consumer utility, nor do they contribute to the production of any good or service that would increase utility. These types of activities are always being motivated by the desire to make a profit from market changes created by government policies.

According to Bhagwati 1982, DUP activities can be defined as ways of making a profit, that is, income, by undertaking activities which are directly unproductive in the sense that they produce pecuniary returns but do not produce goods or services that enter a conventional utility function or inputs into such goods or services.

Such types of activities are profitable activities, but their output is zero. These activities use real resources to produce profit, but no output and these type of activities reduces the availability of resources which are present in the economy.

According to Bhagwati 1982 (The New Palgrave Dictionary 2008 second edition), the various examples of DUP activities are:

• Tariff-seeking lobbying is aimed at earning a profitable income by changing the tariff and, therefore, the factor income.
• Revenue-seeking lobbying helps in the diversion of government revenues towards oneself as a recipient of revenue.
• Monopoly-seeking lobbying, whose objective is to create an artificial monopoly, thereby generating rents from such lobbying of goods and services.
• Tariff evasion or smuggling helps to eliminate the quota and generate higher returns by exploiting the prices between legal and illegal imports.

Thus, it can be said that DUP activities are wasteful activities whose output is simply zero in terms of goods and services available in the economy and moving towards a conventional utility.

Read More in: Theory of Public Finance

1. Public Finance: Meaning, Nature & Scope
2. Role of Government in Economy
3. Role of Government in Mixed Economy: Public & Private Sector
4. Role of Government under Cooperation and Competition
5. Role of Government in Economic Development and Planning
6. Concept of Public Goods, Private Goods, and Merit Goods
7. Concept of Market Failure and Functions of Government
8. Market Failure and Functions of Government: Decreasing Costs
9. Market Failure and Functions of Government: Externalities
10. Market Failure and Functions of Government: Public Goods
11. Future Market: Meaning, Role & Uncertainty
12. Concept of Information Asymmetry
13. Theory of Second Best: Concept & Explanation
14. Problem of Allocation of Resources: Public & Private Mechanisms
15. Preferences: Meaning, Types & Problems of Preference Revelation
16. Preference Aggregation & Its Mechanism
17. Voting Systems, Direct Democracy, Representative Democracy, Leviathan Hypothesis & Arrow’s Impossibility Theorem
18. Economic Theory of Democracy: Concept & Explanation
19. Politico Eco Bureaucracy: Concept & Explanation
20. Rent-Seeking and Directly Unproductive Profit-Seeking Activities
21. Rationale for Public Goods: Concept & Explanation
22. Benefit Theory or Voluntary Exchange Theory
23. Lindahl Model: Concept, Equilibrium & Limitations
24. Bowen Model: Concept, Advantages & Limitations
25. Samuelson’s Model of Public Expenditure
26. Musgrave’s Model of Public Expenditures
27. Demand Revealing Schemes for Public Goods
28. Vickery-Clarke-Groves Mechanism
29. Groves-Ledyard Mechanism
30. Tiebout Model: Concept, Assumptions Equilibrium & Simple Tiebout Model
31. Theory of Club Goods
32. Keynesian Principles of Stabilization Policy
33. Difference Between Keynesian Economic Thought and Others
34. Role of Expectations and Uncertainty in Formulating Stabilization Policy
35. Intertemporal Markets Efficiency & Failure
36. Liquidity Preference Theory
37. Diamond-Dybvig Banking Model
38. Preference Shocks, Adverse Selection & Central Bank
39. Equilibrium Deposit Contract
40. Social Goods and Its Effect on Stabilization Policy
41. Effect of Infrastructural Facilities on Stabilization Policy
42. Effect of Distributional Inequality on Stabilization Policy
43. Effect of Regional Imbalances on Stabilization Policy
44. Wagner’s Law of Increasing State Activities: Explanation, Graph & Criticism
45. Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism
46. Public Expenditure: Concept, Objectives, & Public vs Private Expenditure
47. Pure Theory of Public Expenditure
48. Structure & Growth of Public Expenditure in India
49. Trends, Lessons & Priorities in Public Expenditure in India
50. Social Cost-Benefit Analysis: Project Evaluation, Estimation of Costs & Discount Rate
51. Performance Based Budgeting and Zero Based Budgeting
52. Theories of Tax Incidence: Concentration Theory, Diffusion Theory & Modern Theory
53. Tax System and Its Principles
54. Equity Principle and Efficiency Principle of Taxation: Meaning, Explanation & Examples
55. Ability to Pay and Benefits Received Principle of Taxation
56. Theory of Optimal Taxation: Excess Burden & Distortions of Taxation
57. Deadweight Loss of Taxation: Causes, Measurement & Example
58. Concept of Equity & Efficiency in Economics
59. Trade-Off Between Equity and Efficiency: Meaning & Example
60. Theory of Measurement of Dead Weight Loss
61. Double Taxation: Meaning, Desirability, Forms & Solution
62. Solution to Problem of Double Taxation: Intra-Country & International
63. Double Taxation Avoidance Agreement (DTAA) and Indian Policy
64. Classical View on Public Debt
65. Compensatory Aspect of Public Debt Policy
66. Public Debt or Borrowings: Concept, Need, Sources & Types
67. Concept of Public Debt or Public Borrowings
68. Need for Public Debt or Public Borrowing
69. Sources of Public Debt
70. Classification of Public Debt
71. Burden of Public Debt: Meaning, Types & Explanation
72. Debt Through Created Money or Deficit Financing
73. Public Debt (Public Borrowings) and Inflation (Price Level)
74. Crowding Out of Private Investment and Activity
75. Principle of Public Debt Management and Debt Repayment