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Anne O. Krueger

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    American Economic Association

    The Political Economy of the Rent-Seeking SocietyAuthor(s): Anne O. KruegerSource: The American Economic Review, Vol. 64, No. 3 (Jun., 1974), pp. 291-303Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/1808883

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    t h e P o l i t i c a l Economy o f t h e R e n t -S e e k i n g S o c i e t y

    BY ANNE 0. KRUEGER*In many market-oriented economies,government restrictions upon economicactivity are pervasive facts of life. Theserestrictions give rise to rents of a varietyof forms, and people often compete forthe rents. Sometimes, such competition isperfectly legal. In other instances, rentseeking takes other forms, such as bribery,

    corruption, smuggling, and black markets.It is the purpose of this paper to showsome of the ways in which rent seeking iscompetitive, and to develop a simplemodel of competitive rent seeking forthe important case when rents originatefrom quantitative restrictions upon inter-national trade. In such a case 1) competi-tive rent seeking leads to the operationof the economy inside its transformationcurve; 2) the welfare loss associated withquantitative restrictions is unequivocallygreater than the loss from the tariffequivalent of those quantitative restric-tions; and 3) competitive rent seekingresults in a divergence between the privateand social costs of certain activities. Al-though the analysis is general, the modelhas particular applicability for develop-ing countries, where government interven-tions are frequently all-embracing.

    A preliminary section of the paper isconcerned with the competitive nature ofrent seeking and the quantitative impor-tance of rents for two countries, India andTurkey. In the second section, a formalmodel of rent seeking under quantitative

    restrictions on trade is developed and thepropositions indicated above are estab-lished. A final section outlines some otherforms of rent seeking and suggests someimplications of the analysis.1. Competitive Rent Seeking

    A. Means of CompetitionWhen quantitative restrictions are im-posed upon and effectively constrain im-ports, an import license is a valuable com-modity. It is well known that under some

    circumstances, one can estimate the tariffequivalents of a set of quantitative re-strictions and analyze the effects of thoserestrictions in the same manner as onewould the tariff equivalents. In other cir-cumstances, the resource-allocational ef-fects of import licensing will vary, de-pending upon who receives the license.1It has always been recognized that thereare some costs associated with licensing:paperwork, the time spent by entrepre-neurs in obtaining their licenses, the costof the administrative apparatus necessaryto issue licenses, and so on. Here, the argu-ment is carried one step further: in manycircumstances resources are devoted tocompeting for those licenses.

    The consequences of that rent seekingare examined below. First, however, it willbe argued that rent-seeking activities areoften competitive and resources are de-voted to competing for rents. It is difficult,if not impossible, to find empirically ob-servable measures of the degree to whichrent seeking is competitive. Instead, some* Professor of economics, University of Minnesota.I am indebted to James M. Henderson for invaluableadlvice and discussion on successive clrafts. JagdishBhagwati and John C. Hause made helpful commentson earlier drafts of this paper. I This phenomenon is explored in dletail in Bhag,watiand Krueger.291

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    292 THE AMERICAN ECONOMIC REVIEW JUNE 1974mechanisms under which rent seeking isalmost certain to be competitive areexamined. Then other cases are consideredin which it is less obvious, but perhapsequally plausible, that competition results.Consider first the results of an import-licensing mechanism when licenses forimports of intermediate goods are allo-cated in proportion to firms' capacities.That system is frequently used, and hasbeen analyzed for the Indian case byJagdish Bhagwati and Padma Desai.When licenses are allocated in proportionto firms' capacities, investment in addi-tional physical plant confers upon theinvestor a higher expected receipt of im-port licenses. Even with initial excesscapacity (due to quantitative restrictionsupon imports of intermediate goods), arational entrepreneur may still expand hisplant if the expected gains from the addi-tional import licenses he will receive,divided by the cost of the investment,equal the returns on investment in otheractivities.2 This behavior could be perfect-ly rational even if, for all entrepreneurs,the total number of import licenses willremain fixed. In fact, if imports are heldconstant as domestic income grows, onewould expect the domestic value of a con-stant quantity of imports to increase overtime, and hence installed capacity wouldincrease while output remained constant.By investing in additional capacity, en-trepreneurs devote resources to competefor import licenses.A second sort of licensing mechanismfrequently found in dleveloping countriesis used for imports of consumer goods.TFhere, icenses are allocated pro rata inproportion to the applications for thoselicenses from importers-wholesalers. Entry

    is generally free into importing-whole-saling, and firms usually have U-shapedcost curves. The result is a larger-than-optimal number of firms, operating on thedownward sloping portion of their costcurves, yet earning a "normal" rate ofreturn. Each importer-wholesaler receivesfewer imports than he would buy at exist-ing prices in the absence of licensing, butrealizes a sufficient return on those licenseshe does receive to make it profitable tostay in business. In this case, competitionfor rents occurs through entry into theindustry with smaller-than-optimally sizedfirms, and resources are used in that thesame volume of imports could be efficientlydistributcl with fewer inputs if firms wereof optimal size.A third sort of licensing mechanisnm isless systematic in that government officialsdecide on licenise allocations. Competitionoccurs to some extent through both mecha-nisms already mentioned as businessmenbase their decisions on expectecl values.But, in addition, competition can alsooccur through allocating resources toinfluencing the probability, or expectedsize, of license allocations. Some means ofinfluencing the expected allocation--tripsto the capital city, locating the firm in thecapital, and so on are straightforward.Others, including bribery, hiring relativesof officials or employing the officials them-selves upon retirement, are less so. In theformer case, competition occurs throughchoice of location, expenditure of resourcesupon travel, and so on. In the latter case,government officials themselves receivepart of the rents.Bribery has often been treated as atransfer payment. However, there is com-petition for government jobs and it isreasonable to believe that expected totalremuneration is the relevant decision vari-able for persons deciding upon careers.Generally, entry into governmenit servicerequires above-average educationial at-

    2 Note that 1p)ooe wooll ex1)ect to t1n(d greater ex-cess cal)acity in those ioi(lustries where rents are higher;ani(12) within an industry, more elficient. firns will have,greater excess ca})acity thani less efflicienit tirms, sincethe retuLrnion a given amiiounit of investment xxili l)ehigher with greater eftfiieCiCV.

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    VOL. 64 NO. 3 KRUEGER: RENT-SEEKING SOCIETY 293tainments. The human capital literatureprovides evidence that choices as to howmuch to invest in human capital arestrongly influenced by rates of return uponthe investment. For a given level of educa-tional attainment, one would expect therate of return to be approximately equatedamong various lines of endeavor. Thus, ifthere appear to be high official-plus-unofficial incomes accruing to governmentofficials and higher education is a pre-requisi