Why Is Rent-Seeking So Costly to Growth?

Summary

Published in the American Economic Review Papers & Proceedings 83(2), May 1993 (pp. 409–414), this short theoretical paper by Kevin M. Murphy, Andrei Shleifer and Robert W. Vishny answers the question its title poses: "we explore two reasons why rent-seeking, meaning any redistributive activity that takes up resources, is so costly to growth" (p. 409). It is the mechanism-focused companion to the authors' Allocation of Talent paper.

The Two Mechanisms

1. Increasing returns make rent-seeking self-sustaining. "First, rent-seeking activities exhibit very natural increasing returns. That is, an increase in rent-seeking activity may make rent-seeking more (rather than less) attractive relative to productive activity" (p. 409) — through fixed setup costs (a legal code makes each additional lawsuit cheap), offense-creates-demand-for-defense dynamics, and safety in numbers among rent extractors. In a simple farm-economy model this generates multiple equilibria: a "good" equilibrium with no rent-seeking and a stable "bad" equilibrium in which rent-seekers crowd each other and income is driven to subsistence. The model implies escape requires radical, not marginal, property-rights reform: "the bad equilibrium is stable and will not be affected by minor improvements of property rights" (p. 412).

2. Public rent-seeking taxes innovation hardest. Distinguishing private rent-seeking (theft, litigation) from public rent-seeking (regulatory extraction, corruption), the paper argues that "public rent-seeking attacks innovation, since innovators need government-supplied goods, such as permits, licenses, import quotas, and so on, much more so than established producers" (p. 412). Innovators lack lobbies, collateral and cash for bribes, and their long-horizon, risky projects invite ex post expropriation. Conclusion: "public rent-seeking can put a severe tax on innovative activities and thereby move resources into established production or the public rent-seeking sector. The result would be a sharp reduction in economic growth" (p. 413).

Standing and Limits

This is a P&P piece: a compact model plus argument, not an empirical test. Its evidence is illustrative (Peru, Equatorial Guinea, post-communist Russia, African agriculture via Bates 1987). The propositions have been influential — the paper is a standard citation for why rent-seeking's cost exceeds the resources visibly burned — but the magnitudes are model-dependent, and the mapping from "lawyers/licensing" to measured growth effects remains contested (see the counter-evidence on the outcome page).

Why It Matters for Geoism

The paper generalizes the Georgist intuition that returns to capturing value crowd out returns to creating it, and locates the worst damage where extraction targets innovators — the same distinction the wiki's rent gradient draws between rents proper and the quasi-rents that reward innovation. It does not discuss land taxation; it supplies the growth-cost half of the argument, not the policy half.

See Also

• Rent-seeking drags economic growth — the outcome page this supports
• The Allocation of Talent (MSV 1991)
• Baumol, Entrepreneurship: Productive, Unproductive, and Destructive
• Rent-Seeking

Sources

1. Kevin M. Murphy, Andrei Shleifer & Robert W. Vishny (1993), "Why Is Rent-Seeking So Costly to Growth?" American Economic Review 83(2), Papers & Proceedings, 409–414. Author listing · open scan mirror · JSTOR — used for all quotes and findings on this page (C-claims; quotes verified against the full scanned text, read page by page, 2026-07-10).