Question

What is rent-seeking behavior? Why would competitive rent-seeking lead to dissipation of the entire quota rents?

Answer 1

In economics Rent-seeking involves seeking to increase one's share of existing wealth without creating new wealth

Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection

The compititive rent seeking lead to disspation of the entre quota rents provides incentives for importers and exporters to engage in socially wasteful rent-seeking activities in order to obtain these rents. the quota allocation process can be categorized into the cases when licenses are used to ration the imports and the cases when no licenses are allocated like the first come first served method. Firms will expend resources to contest for licenses, while rent is dissipated through waiting in line if no licenses are allocated. However, whether licenses are allocated or not in the exporting vs importing country determines rent sharing between the two sides and subsequently affects the degree of rent seeking among the exporting vs importing firms.

Finally, export licenses may be required by the importing country while import licenses for importing firms are also a common feature.