# **Introduction**

Why does the incidence of rent extraction among public policy-makers persist, even in stable high-income democratic contexts in which regular elections give voters an opportunity to select senior public policy-makers? Furthermore, why is there significant variation in the perceived incidence of this phenomenon within this subset of countries? Can this variation be explained by differences in the nature of the policy-making context, which conditions the ability of voters to incentivize and/or select rent-minimizing policy-makers?

The conditions under which (1) the misuse of public office for private gain (corruption), as well as (2) the manipulation of laws and regulations in order to extort from, or curry favor with, interest groups (rent seeking and rent extraction) become more or less likely, is now the primary motivating objective of a large portion of the positive political economy literature focused on the determinants of good governance. Underpinning much of this literature are two critical and inter-dependent assumptions. Namely, (1) that the ideal preferences of voters (principals-who favor rent minimization) and public policy-makers (agents-who favor rent maximization) may, under certain conditions, diverge; and therefore (2), if agents have some discretionary power then they may have an incentive to exploit this in order to further their own (private) interests at the expense of the interests of voters.

Despite the multiplicity of ways in which public officials may abuse their powers, the consequences of their actions, with respect to the welfare of voters, is usually adverse. This is mainly due to: (1) the fact that voter priorities (lower taxes, efficient delivery of publicly-financed services) may not be the priority of deviating agents (higher taxes and the diversion of money from the delivery of public services); and (2) the transaction costs associated with such agent preferred activities (resources devoted to lobbying, navigating regulations, coping with market distortions) that may result in the generation of societal deadweight costs<sup>2</sup> . Thus, _rent extraction,_ which is the shorthand term used in the rest of this paper to describe all these varied ways in which agents can abuse their discretion, can have potentially substantial consequences for the welfare of the general public. Therefore, marginal reductions in the incentives of office-holders to pursue rent extraction can result in improved voter welfare.

Although the potentially devastating implications of rent extraction have long been documented (see Muller 2003, pp. 333-358 for a review), it has only been in very recent years, with the proliferation of new methods for measuring the incidence of this phenomenon,<sup>3</sup> that theories regarding the determinants of rent extraction have actually been made subject to increasingly rigorous empirical hypothesis testing. While by no means unanimous in their conclusions, the consensus findings of this empirical literature is that the following macro-level characteristics of a polity are robust predictors of a reduced incidence of rent extraction: (1) a long experience of democratic elections and a free press; (2) a relatively high level of socio-economic development; and, to a lesser extent, (3) a long history of openness to trade<sup>4</sup> . While these findings are extremely useful in

> 2 Readers interested in the distinction between corruption and rent seeking should consult Lambsdorff (2005). Readers interested in the distinction between rent-seeking (public policy officials respond to the incentives provided by interest groups) and rent extraction (interest groups respond to the incentives provided by policy officials) see McChesney (1997). There is a huge literature on the dynamic costs of rent seeking (Tullock rectangle), and one recent estimate puts the costs of rent seeking in Western Europe at 7% of GDP (Angelopoulos et al, 2009).

> 3 The first comparative and systematic data on the level of political corruption and rents and corruption was compiled by PRS Group beginning in 1986. Other prominent measures include Transparency International’s ‘Corruption Perceptions Index’begun in 1995- (data beginning 2011) and the World Bank’s Graft indicator-begun in 1998- (2011).

> 4 See Treisman (2007) for an extensive review and testing of the theories on the determinants of rents and rent extraction. Seldadyo and de Haan (2005),  Alt and Lassen (2008), also find several other variables as being very robust in explaining reduced (-) or increased (+) the incidence of rent extraction–namely population density (-), Scandinavian legal origin (-) and ethnic conflict (+) and to a lesser extent literacy (+), primary school enrolment (+), public sector salaries (+), dependence on fuel exports (-), parliamentary form of government (+) and female labour force participation (+). In their study of US states Maxwell and Winters (2004) find that the size of government (+), population size (+), social homogeneity (-) and citizen education and engagement (-) are robust predictors of rent extraction. Glaeser and Saks (2006) using Maxwell and Winters data (2004) but with a less ‘noisy’ identification strategy find that historical income (-), education (-), income inequality (+) and racial heterogeneity (+) are robust determinants of rent extraction.