Housing Bailout Case Study in Rent Seeking

Guinevere Nell / July 24, 2008

Recently, a scandal has broken out that provides great insight into the housing crisis. Countrywide Mortgage brokers have been treating Congress to VIP lending rates. Accepting donations of $100 or more is illegal for these politicians, but scandals like this are not uncommon. The deeper question is why a profit-seeking business like Countrywide would want to offer discount rates to government officials in the first place. It is, of course, because they expect something in return.

If government could not offer these businesses any preferential legislation, exemptions from taxes or relief from anti-business regulations, there would be no incentive to buy them off.

Economists call this kind of activity rent-seeking. When firms spend money – or decrease their profit – in order to ensure favorable treatment by government it is not efficient. They produce no more output, and instead the resources are wasted. The favorable treatment gives them a monopoly position or an advantage over their competitors and the consumer suffers. (more…)