ABSTRACT
Rent-seeking activities have long been identified by neoclassical and Public Choice economists as a critical pathology of government failure in both developed and developing economies.1 In addition to static deadweight losses caused by government intervention in market processes, it is argued that the dynamic costs are much more substantial due to the wasteful investment of resources by interest groups and individuals to compete for rents created by the intervention. As Anne Krueger put it, “when economic policies create something that is to be allocated less than its value . . . resources will be used in an effort to capture the rights to the items of value.”2 In close association with this demand-side analysis is the theory of regulatory capture,3 which postulates that regulatory agencies-the rent suppliers-do not necessarily operate in the public interest but are liable to be captured by interest groups who demand regulatory arrangements be designed for their private benefit. Consequently, even absent the rent-seeking costs mentioned earlier, patronclient exchange relations may arise between self-interested bureaucrats as rent producers and interest groups as rent seekers and result in serious misallocation of the rents. In other words, the regulation-induced rents fail to be directed to the correction of market failure and the improvement of social welfare as originally suggested by the public interest rhetoric. Rather, they are channeled to serve political favoritism and to entrench special interests.
