Thursday, January 10, 2008

A recession in the rent seeking economy

It is not hyperbole to suggest that the corruption economy is the largest and most widely pervading sectors of the Indian (or any developing country) economy. With everybody talking of a recession in the US, I thought it an appropriate occasion for highlighing the situations under which the rent services economy goes to recession. What determines the price of rent seeking services? What are the distortions in the rent seeking market?

Unlike other sectors of the economy, the rent services sector has certain unique characterisitics. In fact, it would not be incorrect to even claim that the rent market has inherent monopoly characteristics. This is especially true of the more narrow market in the delivery of public services. The monopoly character is given by the fact that Government is the sole provider of such services, and the issuing official the sole authority designated with dispensing it. This makes it all the more vulnerable to price gouging.

Imagine this scenario. There is Department of Poverty Eradication, which is concerned with all the anti-poverty programs of the Government. It is led by a Minister and Heads of Department at the State level, and has tens of thousands of field functionaries, allocated across all the districts. Assume also that the major source of conventional rent seeking in this Department are from procurement and works, and from transfers of officials. The rent seeking chains are multiple and operate across many levels, and often leads upto the highest level. A typical rent chain works its way through different levels of the bureaucracy, bottom-up, (so rent seeking economy exhibits bottom-up characteristics!) and culminates at the decision making level. Given the inherent hierarchical nature of bureaucracy, this in turn means that the individual preferences of the particular decision making authority assumes great importance.

In such an arrangement, the price of the rent is invariably proportional to the rent charged by the highest link in the chain. In some ways this link becomes the price setter. If the highest link charges a high premium, there is a cascading effect across the entire length of the chain, thereby benefiting all the participants in the chain. But if the price charged is too high, there is the distinct possibility of pricing out potential customers. In contrast, if the highest link charges at a discount, it dampens the market and causes discontent among the participants. (Though not always true, generally the rents charged declines in value down the chain) In fact, there is a serious danger of the market itself drying up. Participants may find the price too low to compensate them for the risk undertaken, and may drop out, if only temporarily. In both scenarios, there is the potential for a recession in rent services. There are therefore inherent problems with both the rapacious and the more easily satifsied links.

But of the two scenarios, the former possibility is remote given the low price elasticity of demand for such services. This is especially true of the transfer market, where the depth and breadth, in terms of competing claimants, is often very small and the stakes too high. This ensures that the participation does not vary. Most participants in the rental market for transfers see the high rent values as something similar to making an investment in a high return capital asset, that keeps yielding handsome returns.

There are also situations where the rents have been hard wired into the architecture of the rent seeking economy - an economist would describe the rents as sticky - that it does not change with the official holding the postion. This is true especially at the lower levels of the bureaucracy, where the rents do not vary with changing officials. Such arrangements are likely to continue even if the cumulative rent price is higher than the price normally expected by the buyers. Recession also sets in when a more strict and incorruptible official assumes charge.

It often requires market intervention to stabilize the rent services market and take it out of recession. And this is precisely what actually happens. It is in the interest of the other participants in the chain, or the other stakeholders, to intervene and rectify the distortions. Interest groups soon develop to oust the rapacious or easily satisfied senior official, whose selfish actions have depressed the market and ushered in a recession. The same is true when there is an incorruptible official at the highest link. As is the case with all commodities and services traded in the economy, there is an equilibrium with rent services too, which is neither too high nor too low!

1 comment:

solitude said...

:)You've got fine humour.