Saturday, January 21, 2017

How Do We Fix Rent Seeking?

by Levi Russell

Over at the ProMarket blog, Asher Schechter summarizes some key arguments made at the recent ASSA meetings on rent seeking, antitrust enforcement, and inequality. The post is quite long (for a blog), so I'll just comment on some key paragraphs and leave the rest to the interested reader.
“In all areas of economics, the rules of the game are critical—that is emphasized by the fact that similar economics [sic] exhibit markedly different patterns of distribution, market income, and after tax and transfers income. This is especially so in an innovation economy, because innovation gives rise to rents—both from IPR and monopoly power. Who receives those rents is a matter of policy, and changes in the IPR [Intellectual Property Rights] regime have led to greater rents without having any effects on the pace of innovation,” said Stigltz.
 Stiglitz's complaint about rents from innovation is telling. As I've discussed previously here at FH, if we take a dynamic view of competition, the rents (i.e. profits in excess of all costs) from innovation are merely an inducement to continue innovating. The value of the innovations themselves are still determined by the consumer and the "monopolist" is still incentivized to create what the public wants.

So, taking his last claim at face value, what would explain increasing profits to innovators without concomitant increases in innovation? I don't buy the intellectual property argument. More likely, it's the seemingly unceasing increase in regulation in so many industries. It explains reductions in the pace of innovation because it restricts entrepreneurs from doing what they believe is best for customers. It explains increasing profits because it keeps out new entrants and potentially pushes out smaller competitors.

Both Stiglitz and Deaton agreed that tougher antitrust enforcement is “incredibly important” in reducing inequality (an argument that was explored at length in ProMarket as well), rejecting claims that diminishing the role of government and regulation is the key.
What to do about increasing concentration? Ramp up antitrust enforcement, of course! The problem here is that a move back to the old ways of measuring market power, namely concentration indices, don't accurately capture market power. The work of Israel Kirzner, Harold Demsetz, and William Baumol bear this out. Stiglitz and Deaton seem to want more (or at the very least, not less) regulation, and more antitrust enforcement. The problem is that regulation creates barriers to entry that enhance market power of incumbents!

Campaign finance reform, he said, “would reduce the current selection of Representatives and Senators who are beholden to deep pockets. It’s hard to be elected to Congress or to stay elected without support from well funded interest, and that’s as true in recent years for the Democrats as for Republicans. Congressmen and Congresswomen are the farm team for K-Street.”
Another phrase for "campaign finance reform" is "abridgement of the first amendment." If we're concerned about the power of K Street Lobbyists (and I think we should be), it seems reasonable to address them directly, rather than through potentially damaging the freedom of political speech. If you want to reduce K Street's influence, the most direct way to do so is to reduce the scale and scope of power of the administrative bureaucracy and the legislature.

I'd love to hear readers' thoughts on these selections or on any other topic discussed in the article linked above!


  1. Very interesting topic. A lot of people have noted the fact that many industries are becoming more concentrated.

    Why has that happened? I like your idea that it could be because companies using regulation to create barriers to entry and gain market share. But companies could always have done that. Why has industry concentration specifically been increasing since the '90s?

    Maybe lobbying has become easier in the past 2 decades? That could be possible for some industries. Maybe some industries are becoming more geographically concentrated, making it both easier to collude and easier to lobby politicians?

    This would be an interesting to look into using Mercatus's RegData, I think. One could use Economic Census data to get concentration estimates by industry across time. Then see if there is a correlation between concentration and amount of regulation and also see if that correlation is more pronounced in industries that were becoming more concentrated?

    1. I'm not sure they could have always done it. I think there are political costs for politicians who are perceived to be acting in the interest of businesses at the expense of the public. It takes a desire on the part of public to increase regulation (and their relative ignorance about its effects on competition).

      You're right that it would be relatively easy to put together a regression to test this. I'm not sure, but the RegData people may have already done that.

  2. Yah, it looks like some folks have already used RegData to address a similar question.

    However, it looks like they just regress firm births and deaths on a measure of regulation. They don't try to account for endogeneity. But the public story you're telling would kind of imply that there is a bit of simultaneity going on. Concentrated industries (with fewer firm births) would lobby the government to create barriers to entry to help them maintain their competitive advantage.