The Political Economy of Rent Creation and Rent Extraction

Rent Creation, Rent Extraction, and Rent Seeking are closely related concepts whose relationships are often misunderstood. For example, neither rent extraction nor rent seeking are possible until rents are created. Both rent extraction and rent seeking thus begin with the creation of rents. If one begins with the Hobbesian perspective on anarchy, all rents are ultimately the creation of government policies. Civil law determines what it means to own something, which includes an owner’s claims on the rents associated with his or her property and private activities. One in place, civil law also allows the possibility that rents can be created through private actions. Public policy may alter those claims through changes in use and rent-extraction rights associated with ownership. Such policies may create new rents or redistribute existing rents. In doing so, such policies induce rent-seeking efforts (or not) depending on the policies adopted and the manner in which rents are distributed. The welfare gains and losses associated with the various procedures for rent creation, rent seeking, and rent extraction imply that prohibitions against many, but not all, forms of rent extraction are warranted.