What Avoids the Rational Act of Rent-Seeking

Rent-seeking behaviour is rational. Since the inherent rationality of individuals cannot be changed by preaching and singing that rent-seeking behaviour is fatally and destructively malicious, changing the incentive structure would be of great help to reduce it, argues Aman T. Hailu (amanthinkth@gmail.com).

Rent-seeking is one of the persistent challenges which the government of Ethiopia considers as a threat to its existence. It is also one of the clichés, which sound to have reached ‘semantic satiation’ at the hands of many EPRDF members. It is a song they sing against itself. Two things are apparent, as a result of and in response to this mind-numbing repetition.

First, it is mostly a mere matter of political correctness and conformity. The EPRDFites probably do not mean it. Because if they do, they could have reduced it, if not utterly abolished it, over a long time that they have included it in their dictionary.

Almost every EPRDF cadre has promised to fight rent-seeking behaviour several times in their jurisdiction. Unfortunately, it does not seem to go away. It cannot!

Second, it cringes every time to hear members of the party, particularly those at lower parts of the pyramid, talk about rent-seeking as a threat, to sometimes almost everything. It all shows that they do not comprehend it either. It is a black box which many of them cannot unpack.

It is customary to use keywords, which are fashionably frequented in the party’s contemporary meetings, partly political correctness, to disguise one’s incompetence while showing loyalty partly. It is not to blame anyone though. For anyone who steps back and starts wondering if rent-seeking behaviour is rational, it would be very apparent that it is indeed.

Rent-seeking behaviour is the tendency to gain from public resources more than what one deserves. It is the urge to take more public resources in exchange for too little or no new wealth one creates.

The easiest way to view this is to first think of the value of the whole economy as a giant cake, which is produced and to, supposedly, be equitably distributed among the 99 million of us.

Many people work hard to make this ‘cake’ even bigger and take only their fair share thereof. Many others take a disproportionately huge bite out of it while their contributions are negligible, if not counter-productive.

It is those latter groups of people who can be roughly called rent-seekers. And as odd as it may sound, it is rational for these people to take as big a bite as possible while making as little contribution as they could manage to get away with.

Typically, individuals want to hoard the highest benefits and expend the least amount of efforts. You can call them Cupid but faced with a choice set of gains and costs, they would definitely and consistently pick one that brings them the highest gain at the lowest cost possible. They also expect others to do the same.

The problem is that their share of the cake and what is left of it for others are incongruent. The bigger a bite they take, the smaller there will be for their fellow countrymen, women and children.

In the real world, people like themselves more than anyone else. I also expect that everyone likes themselves more than they could like the next person.

In the old days, this kind of behaviour would be manifested in extreme acts of killing and confiscation of the products of others.

Feudal systems in recent history are typical cases of rent-seeking behaviour, which were the rule rather than the exception, due to weak or nonexistent fair social contract.

Societies have so evolved that daylight burglary and anarchy are rarely options of livelihood anymore. However, the inherent individual behaviour to maximise private benefits with little or no contribution to – and most often than not at the expense of – social well-being always lurks inside the selfish individual business person, the greedy and arrogant politician and the irresponsible civil servant. It manifests itself when there is a loophole in the social contract.

True, there is a good deal of evidence that people could have intrinsic motivation to be other-regarding and pro-social. But still, these people could be dissuaded otherwise; it only takes attractive potential gains and lower personal risks. Particularly, the average Ethiopian is so poor that more money is arguably more attractive than altruism.

The reason to think of rent-seeking this way is that it can hint on possible solutions. Having watched the recent ‘deep reform’ and listened to public grievances, this may help bring another perspective to the table. Telling the rent-seekers – in endless and dull conferences – that they are so and that it is anti-social anti-good governance, anti-development will do no good, for they know it.

Every cupid politician who spends millions of public money on imported luxurious cars, their children’s education abroad, extravagant parties, drinks and all is aware, all too aware of the anti-social nature of their behaviour. But they also, as far as they are concerned, know more is better.

Since the inherent rationality of individuals cannot be changed by preaching and singing that rent-seeking behaviour is fatally and destructively malicious, changing the incentive structure would be of great help to reduce it.

This could be done by raising the stakes of engaging in acts of rent-seeking in such a way the individual finds it more costly, or even more dangerous than behaving otherwise. Let us suppose a typical officer at the customs and revenues authority. If he gets an offer for half a million birr as a ‘gift’ from one of his generous clients, he is likely to consider two things.

One, he will evaluate the chance that he will be caught and prosecuted. Two, he looks into the consequences ‘if’ he gets caught. This gentleman is likely to shy away from accepting such windfall fortune if doing so costs him more than half a million birr.

This happens when and if there is a high probability of being caught and prosecuted, and the punishment, once proven guilty, is prohibitively high. It costs the government a lot of money to monitor each officer, so a feasible and low-cost measure will be to set a punishment level that could destroy the rest of the lives of those who dare to take the risk. A rational officer will most likely stick to the sure and safe outcome of living on his hard-earned salary.

What is happening in Ethiopia seems to do none of these. Prime Minister Hailemariam Desalegn and other higher government officials have told us several times that corruption and rent-seeking behaviour are the major threats to their government. It is hard to rule out the fact that this problem exists even at higher levels of the government hierarchy.

When the people know that those officials who broke the social contract have not been brought to justice, they even get promoted insofar as they remain loyal to the party, it is a tacit but clear indication that the probability of justice being given a chance is low. This low law enforcement probability weighs the expected value of the stakes down.

Personally and at least in principle, I would support a threshold penalty as high as that of China’s, since the lives of irresponsible, greedy politicians are always far inferior to the well-being of the public. It is possible that that kind of law could be misused, a genuine will to creating seamless governance can fix this fairly quickly.

Ethiopia can benefit from setting the stakes of committing acts of corruption and engaging in rent-seeking behaviour so high that individuals will start to avoid it.

Just as it would be hard for anyone to try to rob a bank being guarded by armed men in daylight, sending the message that rent-seeking, power abuse and corruption may, with reasonably high probability, lead to outcomes that no rational person wants to find themselves in is what we need.

This changes the incentive structure so people can ‘first deserve’ – seek rent only in their honest and hard work – and then ‘demand’ their fair share of the cake they all produce.

By Aman T. Hailu

Published on Jun 20,2017 [ Vol 18 ,No 895]



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