Why Is Rent-Seeking So Costly to Growth?

Economists from Adam Smith (1776) to Douglass C. North (1981) agree that poor protection of property rights is bad for growth. But why is this problem so severe? Why do Peru (Hernando De Soto, 1989) and Equatorial Guinea (Robert Klitgaard, 1990) fail to grow at all when public and private rent-seeking make property insecure? In this paper, we explore two reasons why rent-seeking, meaning any redistributive activity that takes up resources, is so costly to growth. 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. This condition can lead to multiple equilibria in the economy, with "bad" equilibria exhibiting very high levels of rent-seeking and low output.l Second, rent-seeking, particularly public rent-seeking by government officials, is likely to hurt innovative activities more than everyday production. Since innovation drives economic growth, public rent-seeking hampers growth more severely than production.