In this section, I briefly review the two main insights from Tullock (1967) and propose a general taxonomy that can help clarify the link between corruption and rent seeking.

The core ideas of the rent-seeking literature

It is useful, I think, to start by clarifying the main ideas and concepts, even if they are familiar to most readers. The rent-seeking literature embodies two core ideas, which can both be found in Tullock (1967). The insights are:

1. The missiles seek heat hypothesis: A contestable rent induces rent-seeking activities aimed at capturing the rent. These activities involve unproductive use of real resources and cause a social loss. 2. The invertability hypothesis: Rent-seeking costs are, by and large, unobserved but by applying contest theory and assumptions about the behaviour of rent seekers, the size of the social cost can be inferred from the value of the contestable rent.

Examples of contestable rents are abundant: assigning monopoly rights, protectionist trade policies, privileged budget allocations, income transfers, national resource rights, and so on. The distinguishing feature making a rent contestable is that ex ante—i.e., before it is assigned to any particular economic agent—it is up for grabs. This is what makes it rational for potential beneficiaries to expend resources in contesting rents.

Contestable rents differ from contestable profits, which trigger socially productive activities (Buchanan 1980). Contestable profits play an important and efficiency enhancing role in the allocation of resources in a capitalist market economy. Economic agents have an incentive to expand into markets with profits and to innovate to create profits; this improves resource allocation, expands output of the economy and increases aggregate welfare.

Many contestable rents are created and protected by government policy and government officials and politicians are gatekeepers who regulate who gains access to the rents. This is what Tullock had in mind. In this case, economic agents cannot contest the rent by shifting resources directly into production of the underlying good or service. Instead, they are motivated to invest time, effort and other real resources—to engage in rent-seeking activities—in attempts to secure either the initial assignment of the right to the rent or in ousting others from their position of privilege. These resources are employed unproductively but have social value in alternative employment.

All this is largely unobserved and certainly not recorded by any statistical agency and reported to the public. This makes it hard to know how large these loses really are. Fortunately, the second insight—the invertability hypothesis—can help: the social loss can be inferred through contest-models from the size of the contestable rent. It is, in other words, possible to “invert” the process and use the size of the observable rents to infer the unobserved social cost of rent seeking. A very extensive literature on rent dissipation, including Tullock’s (1980) paper on efficient rent seeking, has subsequently demonstrated that the possible relations between the observable rent to the underlying rent-seeking expense are complex and contingent on many assumptions or influences.Footnote 2

Definitions and taxonomy

In order to examine the influence that the two core insights from the rent-seeking literature have had on the corruption literature, the starting point must be to settle on definitions of what the two social phenomena are and to develop a workable taxonomy that can help us organize the material.

The standard definition of “rent seeking” is the quest for privileged benefits from government [see, for example, Hillman (2013)]. While there is general agreement on this definition, it has proved much harder to converge on a widely accepted definition of corruption.Footnote 3 An often used definition of corruption amongst economists is “sale by government officials of government property for private gain” (Shleifer and Vishny 1993) or situations where “the power of public office is used for personal gain in a manner that contravenes the rules of the game” (Jain 2001).

Taking these definitions at face value, it is clearly possible to have rent seeking without corruption and vice versa. If, for example, a government official is charged with allocating mobile phone licenses and the rules specify that he must select the company that makes the “most convincing case for efficient service delivery” and if he follows this rule to the best of his ability, then there is no corruption. Yet, there will be a lot of rent seeking. The mobile phone companies will expend vast resources on making their case for being the best for the job. Conversely, it is also possible to have corruption without rent seeking. Suppose, for example, that one of the companies pays a bribe to obtain the license without any checks on its ability to deliver the services efficiently (and no one else makes any effort to show their fitness for the job), then we clearly have a situation of corruption but without any real resources have been used unproductively in rent-seeking activities. This line of reasoning, however, gives the impression that corruption and rent seeking are entirely different social phenomena and that is misleading and unhelpful. The problem is that the definition of corruption used in the economics literature is too narrow.

It is more fruitful, as suggested by Lambsdorff (2002, p. 98), to employ a broader definition. Thus, let me define corruption as a special means by which private agents may seek to pursue their interest in competition for preferential treatment by government officials or politicians and where the “means” are valued by the recipient. The primary example of a “special means” is a bribe—a monetary payment in return for preferential treatment. The use of personal contacts (favouritism) according to the principle “you help me and I will help you” is another example.

This definition alongside the definition of rent seeking itself highlights an important consideration. It matters a lot from a social point of view, if the “means” of seeking preferential treatment involves the outputs or income from the production process or it involves the direct use of factors of production. In the first case, the available factors of production are employed to produce output and generate income to the factor owners, i.e., the economy is on the production frontier (maybe on a second best frontier, but nonetheless on the frontier). Some of the income thus generated may be used to seek rents and preferential treatment. This is the situation envisaged by much of the corruption literature. In the second case, factors of production, for example, labour, which could have been employed in production of output are deployed in the process of seeking rents—people who could become entrepreneurs become lobbyists. As a consequence, the economy produces below its production frontier and output and income is lost. This is the situation envisaged by the rent-seeking literature which is concerned with the efficiency losses due to unproductive use of resources in the quest for rents.

Using the definitions, corruption and rent seeking can be combined as instances of influence-seeking activities. Such activities can be distinguished along two dimensions: whether the gatekeeper who assigns the rent benefits from the influence-seeking activities and whether the influence-seeking activity involves a transfer of income (bribe) or unproductive use of resources. This gives rise to the two-by-two taxonomy in Table 1a and the illustrative examples in Table 1b.

Table 1 Taxonomy of influence-seeking activities Full size table

According to this taxonomy, pure corruption refers to the case where competition for preferential treatment is such that the gatekeeper benefits from the influence-seeking expenses/activities in the way of a costless income transfer from the beneficiary to the gatekeeper. Pure rent seeking refers to the situation in which competition for preferential treatment is such that the gatekeeper does not benefit from the influence-seeking expenses/activities, which represent unproductive use of factors of production. The case of impure corruption emerges if the income transfer is associated with a transaction cost such that the value of the income transfer to the gatekeeper is lower than the cost to those paying the transfer. Impure rent seeking emerges if the unproductive use of factors of production in seeking influence may, in fact, benefit the gatekeeper.

There are, of course, a whole raft of intermediate cases and many other distinctions can be made (corruption is restricted to a few competitors while rent seeking is open to all; corruption is not legal, while rent seeking is, etc.), but the two-dimensional taxonomy is, at the very least, helpful in clarifying the link between the rent-seeking and corruption literature. Most of the corruption literature is concerned with situations where the gatekeeper gains and the influence-seeking activity represents an income transfer. Bribery is the classical example of this which is often viewed as a costless transfer (e.g., Rose-Ackerman 1975; Lui 1985). In reality, even bribery is associated with transaction costs (e.g., Tirole 1992). This reduces the value of the bribe for the gatekeeper and in the limit, makes it worthless. The classical rent-seeking literature, including the examples given by Tullock (1967) and the analysis in Hillman and Samet (1987) and many other papers on rent dissipation is about pure rent seeking: real resources are being employed in seeking, say, a government-sponsored monopoly rent, which is assigned without any gain to the official who assigns it. However, it is possible to envisage cases in which the gatekeeper may gain. The literature on contest design, for example, engages with the possibility that the rent-seeking expense is, in fact, valued by the government official who assigns the underlying rent (Gradstein and Konrad 1999; Epstein and Nitzan 2015). This leads to what I call contestable bribery in Table 1b.