The Art of Rent-Seeking

The $100 Bill on the Sidewalk

There's a $100 bill sitting on a table. Two people can compete for it by spending money on "lobbying" — whoever spends more is more likely to win, but neither gets their spending back. How much should you spend?

Here's a game that economists love and everyone else should find deeply unsettling. I'm going to put a hundred-dollar bill on the table. You and one other person can each spend money trying to win it. The more you spend relative to your opponent, the more likely you are to grab the prize. Specifically: if you spend $60 and your opponent spends $40, you win with probability 60/100 = 60%.

So what's your expected payoff? You win $100 with probability 60%, so your expected winnings are $60. But you spent $60 to get there. Your expected profit is $60 − $60 = exactly zero.1

Your opponent isn't doing any better. They win $100 with probability 40%, for expected winnings of $40, minus their $40 spent: also zero. Between the two of you, you've spent $100 — the entire value of the prize — and produced absolutely nothing. The money just... evaporated.

Now, $60/$40 is not what game theorists would call an equilibrium. (We'll get to that in a moment.) But the fact that there exists a combination of spending levels where the total expenditure swallows the whole prize should already set off alarm bells. It's a game where fighting hard enough makes the trophy worthless.

This is the Tullock contest, named after the economist Gordon Tullock, who described it in 1967.2 And it's not just a thought experiment. It's a disturbingly accurate model of how enormous amounts of real wealth get destroyed every single day.

The word "rent" in economics doesn't mean what your landlord charges you — or rather, it does, but in a very specific way. Economic rent is income you earn not because you produced something, but because you control something scarce. Your landlord doesn't earn rent because they built the land. They earn it because they own the land, and land is scarce. The rent would exist whether or not the landlord did anything useful at all.

Rent-seeking, then, is the activity of spending resources to capture those rents — to get your hands on income that already exists, rather than creating new wealth. It's fighting over the pie instead of baking it.

The Tullock Contest Function

Let's be precise about the math, because the math is where the horror lives.

Two players compete for a prize of value V. Player A spends a and Player B spends b. The probability that A wins is:

V

Value of the prize

a, b

Player A's and B's spending

r

Discriminating power — how sharply spending differences translate into winning

The parameter r is the secret weapon of the model. When r = 1, spending and winning scale proportionally — the "fair lottery" case. When r is large, even a small spending edge almost guarantees victory, like an all-pay auction. When r is small, spending barely matters — the contest is nearly random. We'll start with r = 1 to keep things clean, and return to the general case when things get really interesting.

Player A's expected payoff (with r = 1) is therefore:

Now here's the key question: what's the Nash equilibrium? What level of spending makes neither player want to change their strategy?

Player A maximizes their payoff by choosing a such that the derivative equals zero. Taking ∂E(A)/∂a and setting it to zero gives us Vb/(a+b)² = 1. By symmetry, B faces the same equation with the variables swapped. In a symmetric equilibrium where a* = b*, we get:

So with two players and a $100 prize, each spends $25 in equilibrium. Total spending: $50. That's half the prize wasted on pure contest, producing nothing. Each player's expected profit is $50 − $25 = $25 — positive, but the $50 they collectively burned could have been someone's groceries.3

But wait — it gets worse. With n players, the equilibrium total spending is V · (n−1)/n. Three players? Total spending is $66.67. Ten players? $90. A hundred players? $99. As the number of competitors grows, total spending approaches the entire value of the prize. Complete dissipation. All the value, destroyed in the fight over it.

And if r > 1 — if the contest rewards aggression — things get even darker. When r > 2 in the two-player case, there's no pure-strategy equilibrium. Players resort to mixed strategies, randomizing their spending. Total expected expenditure can actually exceed the prize value. People collectively spend $120 to win $100. It sounds insane, but it happens in the real world all the time. Think of two companies locked in a patent lawsuit, each pouring millions into legal fees that dwarf the value of the patent in dispute. Think of political campaigns where candidates collectively spend more on a congressional seat than the salary it pays over an entire term.

The Rent-Seeking Zoo

Okay, you might say, this is a cute model. But who actually plays Tullock contests in real life?

Everyone. All the time.

In 2023, the United States lobbying industry spent $4.1 billion — just the part that's officially reported.4 That's $4.1 billion spent not on building factories, developing products, or training workers. It's spent on convincing legislators to tilt the rules in the spender's favor. It's spending money to get money — the textbook definition of rent-seeking.

But lobbying is only the most visible costume in what I like to call the rent-seeking zoo.

This is Mancur Olson's collective action problem, described in his 1965 book The Logic of Collective Action.6 When benefits are concentrated and costs are diffuse, the beneficiaries will organize to defend their rents, and the people paying for it won't bother to organize against them. Not because they're stupid — because it's individually rational not to bother.

The math is simple. If fighting the sugar tariff would save you $10.60 per year, but joining an anti-tariff lobbying group costs $50 in dues and ten hours of your time — why would you bother? You wouldn't. And neither does anyone else. And so the tariff persists.

Patent trolls — companies that acquire patents not to build products but to sue people who do. They produce nothing; they just extract money from people who produce things, using the legal system as their Tullock contest arena. Patent troll lawsuits cost the U.S. economy an estimated $29 billion per year in direct costs alone.7

Taxi medallions — In New York City, a taxi medallion (the license to operate a cab) sold for over $1 million in 2013. The medallion doesn't make the driver better. It doesn't make the car safer. It's a government-created artificial scarcity that generates rents for medallion holders at the expense of riders and would-be drivers. When Uber arrived, medallion values crashed to under $200,000 — revealing that over $800,000 of that value was pure rent.

Occupational licensing — Louisiana requires 500 hours of training to become a licensed florist. Five hundred hours. To arrange flowers. Who do you think pushed for that requirement? Not consumers worried about dangerous bouquets. It was existing florists, using the state to limit competition — the definition of rent-seeking.

Regulatory capture — When the industry being regulated effectively controls its regulators. The revolving door between Wall Street and the SEC, between pharmaceutical companies and the FDA, between telecom giants and the FCC. The regulations that were meant to protect the public end up protecting the incumbents from competition.

Counting the Waste

In 1974, Anne Krueger published a landmark paper attempting to quantify rent-seeking losses.8 She looked at two countries — India and Turkey — where government-issued import licenses created huge rents for license holders. Her estimates were staggering: rent-seeking consumed approximately 7.3% of India's GDP and 15% of Turkey's GDP.

Think about what that means. In Turkey, roughly one out of every seven dollars of economic activity wasn't creating value — it was fighting over who gets to capture value that already exists. Imagine if those resources had been invested productively instead. That's not an accounting abstraction. That's hospitals not built, research not funded, businesses not started.

More recent estimates put the total cost of rent-seeking in the U.S. economy at somewhere between 3% and 15% of GDP.9 Even at the conservative end, that's over $800 billion per year — resources consumed by the contest itself rather than by anything the contest produces.

And the deadweight loss from rent-seeking is actually worse than the direct spending. When an industry spends $100 million lobbying for a $2 billion subsidy, the social cost isn't just the $100 million spent lobbying. It's also the distortion in how the $2 billion gets allocated — money steered to politically connected firms rather than productive ones. The lobbying spending is the visible tip; the iceberg below is the distorted policy itself.

Why Can't We Stop?

If rent-seeking is so wasteful, why does it persist? Because of a cruel structural asymmetry.

Consider the situation from the perspective of any individual firm. Suppose your competitors are all lobbying for favorable regulations. If you don't lobby, you're at a competitive disadvantage — you'll be subject to rules designed to benefit your rivals. So you lobby too. It's a prisoner's dilemma: everyone would be better off if nobody lobbied, but given that others are lobbying, each firm's best individual response is to lobby as well.

This is exactly the logic of the Tullock contest. Each player knows that the total spending is wasteful. But no individual player can improve their position by unilaterally reducing their spending. The waste is the equilibrium.

Tullock himself had a dark sense of humor about this. He pointed out that the true social cost of rent-seeking includes not just the resources spent on lobbying, but also the resources spent defending against lobbying. When one industry lobbies for tariffs, competing industries have to lobby against them. The lawyers, PR firms, and political consultants on both sides are all consuming resources that produce no value. It's an arms race where the weapons are briefcases.

And there's a subtler cost that doesn't show up in anyone's expenditure reports: talent misallocation. When lobbying returns 3,900% on investment (as our calculator illustrates), the smartest people in the room are drawn to lobbying rather than engineering, or lawyering rather than research. Murphy, Shleifer, and Vishny showed in a famous 1991 paper that countries with more lawyers per capita tend to grow more slowly, while countries with more engineers per capita tend to grow faster.10 It's not that lawyers are bad people. It's that when the path to riches runs through the courthouse rather than the laboratory, that's where the talent flows — and the economy gets less innovation as a result.

The Hard Part: Prescription

The Tullock model suggests a seemingly clean solution: reduce the number of prizes. If the government can't hand out special favors — can't create artificial monopolies, can't give out selective subsidies, can't impose tariffs that benefit specific industries — then there's nothing to rent-seek over. The contest disappears because the prize disappears.

This is the logic behind deregulation, behind trade liberalization, behind constitutional constraints on government spending. And there's real force to it. Countries that reduced discretionary trade barriers — like Chile and New Zealand in the 1980s — saw declines in lobbying intensity and increases in productive investment.

But here's where a mathematician has to be honest about the limits of the model. The prescription "just remove the prizes" runs into a problem: some of those prizes are good. Environmental regulations create rents for compliance firms and create lobbying incentives for polluters — but they also keep arsenic out of the drinking water. Patent law creates an entire ecosystem of trolls — but it also gives inventors a reason to invent. The FDA's drug approval process generates a vast lobbying apparatus — but it also keeps thalidomide off the shelves.

The Tullock contest tells you that every prize generates waste. It does not tell you that the prize isn't worth the waste. A policy that generates $50 million in rent-seeking costs but $5 billion in public health benefits is still a very good policy. The math of rent-seeking is a tool for measuring costs, not a blanket argument against government action.

The better approach, most economists now agree, is institutional design: creating rules that minimize the discretion available to rent-seekers without eliminating the underlying policy goals. Automatic stabilizers instead of discretionary bailouts. Rule-based regulations instead of case-by-case permits. Transparent procurement processes instead of backroom deals. You can't eliminate rent-seeking entirely — wherever there's a prize, someone will try to capture it — but you can change the rules of the contest so that the waste is smaller relative to the value at stake.

The Lesson

The Tullock contest is, at its core, a parable about the difference between positive-sum and zero-sum games. In a positive-sum game, your gain is compatible with everyone else's. When you build a better mousetrap, you get rich and the world gets fewer mice. In a zero-sum game — or worse, a negative-sum game — your gain is someone else's loss, and the fight over the gains burns up real resources in the process.

Rent-seeking is the activity that turns positive-sum economies into negative-sum contests. It takes resources that could be building mousetraps and diverts them into fighting over who gets to sell the mice. And the deepest mathematical insight from Tullock's model is that this waste isn't an accident or a bug. It's the equilibrium. It's what rational agents do when the rules of the game reward capturing rather than creating.

So the next time someone tells you that a particular regulation is essential for public safety, or that a particular subsidy is vital for national security, run the Tullock calculation in your head. Ask: how much is being spent on the fight over this policy? Who's paying the lobbyists — and what would those lobbyists be doing if they weren't lobbying? The answers won't tell you whether the policy is right or wrong. But they'll tell you something that the official justification never will: the true cost of the contest.

Because in the Tullock world, the most important number isn't how big the prize is. It's how much of the prize gets burned in the fight to win it.