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Definition of Rents. A person gets a rent if he or she earns an income higher than the minimum that person would have accepted, the minimum being usually defined as the income in his or her next-best opportunity.
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Definition of Rents A person gets a rent if he or she earns an income higher than the minimum that person would have accepted, the minimum being usually defined as the income in his or her next-best opportunity. A typical textbook definition of a rent is “the portion of earnings in excess of the minimum amount needed to attract a worker to accept a particular job or a firm to enter a particular industry” (Milgrom and Roberts 1992: 269). The “minimum amount needed to attract” suppliers of inputs (such as workers and capitalists) to particular industries should not be confused with the payments which may actually be necessary to induce them to produce the good or service. If the payment is necessary, the rent may be efficient.
Why are rents interesting? Stiglitz and others have shown that many rents are essential for the normal operation of a market economy: the competitive market model is not only wrong but actually very misleading: many types of surpluses can be necessary and growth-enhancing Stiglitz focuses on rents that are necessary for overcoming information asymmetries and achieving second-best efficient outcomes: these rents are important but they are a very narrow range of necessary rents At the same time many rents are damaging and are very similar to the unproductive surpluses that Marx was writing about We will see that rents are closely related to rights, that is to the enforcement of rules by institutions: rents are therefore a lens through which to examine the role of institutions in economic development
Monopoly Rents 1: The Competitive Market Equilibrium The existence of the producer surplus is not in itself a problem. Its existence, like that of any other rent, would only be a problem if it signalled a lower net social benefit.
Monopoly Rents 2: The Monopoly Outcome The social cost of the monopoly is not the rent BCDP2 (which is only a transfer within society), the social cost is the deadweight loss DCE.
Rent, Consumer Surplus, Producer Surplus under a Monopoly BCDP2 remains part of the net social benefit, but is differently distributed, but CDE is lost completely.
What the neoclassical analysis of monopoly rents ignores The static neoclassical analysis described so far misses out a number of other potential costs and benefits of monopolies i) Monopolies may have higher costs due to X-Inefficiency. Low incentives to lower costs. However, even a small group of companies can engage in vigorous competition which lowers costs: we do not need perfect competition. ii) Monopolies may have lower incentives for dynamic cost reductions, namely through technical progress. However, they may also have higher incentives for technical progress if the monopoly allows them to retain the benefits of technological innovations for longer. This is the Schumpeterian argument.
Natural Resource Rents With free access, the rent is ABC-CDE. With private or collective property rights, ABC (which is like a producer surplus) is the rent which is collected by the new owners, by virtue of their ownership of the asset.
What the neoclassical analysis of natural resource rents ignores The creation of property rights need not enhance net social benefit if alternative opportunities for employment for excluded users of resources do not exist. There is no point in saving the commons at the cost of starving people to death What is true of natural resources is true of all property rights in a capitalist economy. The owners of all property rights earn a surplus simply by virtue of ownership and control (but through different mechanisms): this is what Marx described as the capitalist surplus The period of transition to a property right system is therefore likely to be a period of intense contestation and conflict where property right stability is not likely to dominate
What the mainstream analysis of Transfer Rents ignores The focus on transfers in mainstream theory is largely on the incentive effects of the transfer for other sectors that have to pay for it. The conclusion is that transfers have a social cost measured by a deadweight loss just like any other rent. This analysis ignores the critical role of transfers in capitalist societies for maintaining political stability (even ignoring any welfare gains as a result of transferring from the rich to the poor) Many economically necessary rents are also often created through transfers (for instance taxes or subsidies to deal with environmental externalities) The net social benefit change associated with a transfer can therefore be very negative with the deadweight loss outweighed by much larger benefits
Schumpeterian Rents Giving the innovator a rent of P1ADP2 involves a notional loss for the consumer of ABCD in the short run. The policy question is “does the long-run spur to innovation justify this short-run sacrifice?”
Policy Question about the Period of Protection The shape of the benefits curve is a matter of judgement: it depends on i) the riskiness of technologies and ii) the “animal spirits” of investors.
Learning Rents in Developing Countries The short-run social cost in this case is PFCD + the deadweight loss as other sectors are taxed. The long-run social benefit is the possibility of technology progress and the capture of APQ.
Policy Question about the Period of Protection The shape of the benefits curve is a matter of judgement: it depends on i) the degree of backwardness of the catching up country and ii) the existing capacities of entrepreneurs and workers to learn rapidly
The Maintenance of Rents Involves the State in Maintaining or Changing Property Rights
How Much will Rent-seekers Invest in Rent-seeking? The answer depends on the assumption we make about how rent-seeking expenditures change the probability of winning the rent: Suppose we assume that the probability of winning depends on the proportion of total expenditure spent by that person: πi = Ei / (ΣEi) Then each person will spend till ΣE = R (the total rent available)
The Rent-Seeking Expenditure: Additional Variables i) Institutional Rules: Can a dictator ration rents such that the total rent-seeking expenditure is lower? In principle the answer is yes, but only if the distribution of social power prevents secondary rent-seeking that seeks to contest such allocations. ii) Insider advantages: If insiders have large sunk costs, outsiders might find their threat to fight credible and stay out. However, once again the distribution of power plays a key role, insiders are frequently challenged when outsiders are powerful and can take on the insiders. iii) The Distribution of Power: An equal contest may lead to prolonged contestation and large rent-seeking costs.
The Rent Outcome of Rent-Seeking typically has both gainers and losers
Rent-Seeking Structures and Rents in Four Asian Countries 1960-90
Bureaucracy Politicians Capitalists South Asia: Fragmented Clientelism B P B B B P P P B B B P P N N P C C Non-Capitalist Clients
