2 - Reviewing the Literature: Theories and Puzzles

Summary

This chapter discusses relevant aspects of the literature on rent-seeking, market reforms, and the state which inform this study. After expounding on the theoretical background, the fourth section deals with telecommunications reform issues in order to provide an introduction to developments in the sector and demonstrate why the case is a rich source of data for the puzzles dealt with in this book. The final section links the puzzles and arguments with the pertinent theoretical issues.

Rents and Rent-Seeking

James Buchanan, one of the founders of public choice theory, defines rent as that part of payment to an owner of resources that is over and above what those resources could command in any alternative use. Put another way, rents are incomes that are more than the income that an individual or a firm would have received in a competitive market. Some scholars categorize rents according to their origin — whether they are economic (market rents) or political rents. For them, rent-seeking is usually reserved for actions that lead to the capture of political rents. Thus, rent-seeking is sometimes defined as resource allocation by the state or through political means, as opposed to resource creation in the market. The underlying assumption is that political rents are inefficient, but market rents are not. This classification, however, misses out on hybrid forms of rents: for instance, those that originate in market performance but are sustained by the government to encourage learning, innovation, or development, and rents that are politically created but are reaped in a competitive market.

Khan enumerates no less than six types of rents: monopoly, natural resource, political transfer, Schumpeterian or innovation, learning, and monitoring. Monopoly rents emerge as a result of entry barriers, allowing a firm in protected markets to charge higher prices for their products. Entry barriers can be natural (when the technology of production involves economies of scale) or state-produced (via the creation of exclusive production rights). Natural resource rents accrue to the owners of scarce natural resources. Political transfer rents not only help redistribute incomes, but also to create new property rights, and often entirely new economic classes in developing countries. Schumpeterian rents reward innovation.