Rents, Efficiency and Growth

Abstract

For the economist, rents refer to ‘excess incomes’ which, in simplistic models, should not exist in efficient markets. More precisely, a person gets a rent if he or she earns an income higher than the minimum that person would have accepted, the minimum being usually defined as the income in his or her next-best opportunity . A glance at the real world tells us that rents as excess incomes are widespread in all types of economies. Rents may take the form of higher rates of return in monopolies, the extra income from politically organized transfers such as subsidies, or the extra income which comes from owning scarce resources, whether natural resources or specialized knowledge. What does economic theory say about the effects of such excessive incomes or ‘rents’? This chapter begins with an analysis of rents in conventional neo-classical economics and proceeds to examine how this analysis needs to be extended (and, to some extent, has already been extended in recent years) to analyse the different types of rents which exist in real economies. Drawing on both neo-classical and non-neoclassical economic theories, we see that the efficiency and growth implications of different rents can be very different. While some rents are indeed inefficient and growth-retarding, other rents play an essential role in growth and development. This variability has important policy implications. The identification of some rents as ‘efficient’ challenges the policy rule-of-thumb of the liberal market model which says that the removal of institutions and rights which protect rents is always desirable as a way of moving towards greater efficiency and better economic performance.

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