The Rent Seeking Theory

Gordon Tullock advanced the idea of Rent Seeking in 1967 in connection with monopolies. He

explained that rent-seeking is the idea that individuals or firms seek to gain benefits for

themselves using the political stage. Rent seeking is also defined as efforts to increase the share

of one’s existing wealth without actually contributing to the creation of new wealth. Thus it

supports the motive for interest rate capping which is to reduce exploitation of customers done

by commercial banks who charge exorbitant interest rates. Banks are then viewed as those who

engage in rent seeking practices at the expense of consumers by charging high interest rates

initially before interest rate capping. Rent seeking behaviour proves to be costly and it leads to

poor allocation of resources, reduced actual wealth creation, income inequality increases and

there is a potential economic decline. Organizations who engage in rent seeking value rent-

seeking rather than productivity.

Through interest rate capping, there is an effort to curtail the rent seeking behaviour with the

intention of protecting consumers and make credit accessible and affordable to all. Joseph

Stilglitz an American economist actually argues that rent seeking has contributed highly to

income inequality in the United States. Those countries who institute interest rate cap support

this theory is actually in place and there needs to be a turnaround to protect the exploited in the

society.