Rent-Seeking Society

Rent-seeking occurs inevitably in every society, however, some societies suffer from it more and some others less. In this article, I would like to discuss the reasons why rent-seeking may happen in the first place. Secondly, how people should look at various seemingly not rent-seeking actions. Finally, I will place an example from the Czech Republic which could be shown as an interesting example of rent-seeking society with many particularities.

Rent-seeking generally means capturing rent through political process (i.e. laws or regulations in favour of a particular pressure group) at the expense of others. Therefore, rent-seeking activities and consequent rents do not lead to the enlargement of nation’s wealth but rather to its redistribution, which is, by definition, a wasteful activity. Naturally, if a nation operates large budget, there is a lot at stake in terms of a rent and there are greater incentives to get it. Similarly, when a state adopts complex and difficult laws, there is a higher probability that an additional paragraph or an exception will be inserted, because one additional paragraph is not visible among others (economically speaking, marginal cost of implementing them decreases with the number of exceptions).

Non-economists usually classify economists into the ones who measure everything in money and the ones who are blind to other “facts” (whatever this means). They may be right, but why shouldn’t we look at things in this way if people, often inadvertently and not-knowingly, bear the costs that rent-seeking produces? We can start with basic example of taxi driver licenses. Taxi drivers are relentless advocates of complicated licenses because without them, obviously, everybody could do the job and there would be no rent. The role of an economist should be to point out this fact and explain it to the public as simply as it is possible. But certainly there are more difficult examples of rent-seeking to reveal.

In line with Bryan Caplan (2007),[1] people, not only in the Czech Republic, probably underestimate the true level of rent-seeking. Let us start with the Czech tax laws, which are, literally, filled with exceptions. They especially help the richer part of population which is more able (financially or professionally) to circumvent taxes or to hire a tax advisor.[2] Luckily, if you are rich enough (over 50 mil CZK, approx. 2 mil €), you can create the fund of qualified investors which is taxed only 5%. In a sense, this leads to a regressive tax rate or rather, reversely, U-shaped rate when the middle class pays the highest proportion.[3]

For similar (rent-seeking) reasons, there exist in the Czech Republic six parallel accounting regulations (standards).[4] It is more than obvious that it is not necessary to have so many standards; they were made at the request of the Big Four – consulting companies (KPMG, Ernst&Young, PwC and Deloitte). If we compare these laws, which are mainly principle-based and there are no clear and firm rules, with the best accounting standards US GAAP,[5] the situation is rather unsatisfying. Oddly enough, banks and insurance companies have two standards which make it very difficult to make consolidated financial statements and it is, therefore, very costly for them (and very lucrative for the Big Four). In the end, however, these costs are paid by the ordinary clients of banks and insurance companies in the form of lower interest rates (or higher fees) on their bank accounts or higher interest rates for entrepreneurs, which consequently lower entrepreneurial activity and thus increase unemployment.

By these examples (out of many), I wanted to show some particularities of the Czech rent-seeking society. To conclude, these laws, regulations and the like increase the cost of production and increase the cost of living which, in turn, means lower standard of living. Not to mention that a country loses its competitiveness and also attractiveness to foreign investment in comparison with other countries in which there are no resources wasted in this way. We should bear in mind that one role of economists is to point out these facts, to explain how unnecessary some laws are, and to look for the true incentives of various rent-seeking activities.

[1] His famous book: The Myth of the Rational Voter: Why Democracies Choose Bad Policies. Princeton University Press, 2007.

[2] There is an interesting example which the Czech Republic has in common with Slovakia. Although both countries started in the 1990s with the tax code without loopholes, after 20 years they both look similar (with differences) in case of magnitude, or the number of various exceptions. This example also shows that both governments are obviously not resistant to various pressure groups, which can rather easily put the exceptions in.

[3] Nevertheless, from the 1st January there is a new solidarity contribution of 7% for income higher than 100 000CZK.

[4] There is regulation n. 500/2002 Sb. which is more or less general for entrepreneurs. Then, special regulations n. 501/2002 for banks and other financial institutions; 502/2002 for insurance companies; 503/2002 for health insurance companies; 504/2002 for non-entrepreneurial institutions and 410/2009 for local governments, contribution institutions, state funds and organizational parts of a state.

[5] The US GAAP are considered to be the most transparent and clear because they are “rule-based,” and it is very difficult to circumvent them. For example, IFRS (International Financial Reporting Standards) are “principle-based,” which allows to an extent to create our own “interpretation” and find some loopholes more easily, which means profitable business for auditors and consultant companies.