Economic Freedom Reduces Rent Seeking

Introduction

Every year, state governments hand out billions of dollars through subsidies, tax carve-outs, and procurement contracts. Wherever public money flows, a specialized workforce grows up around the business of winning, keeping, or defending a piece of it. This includes lawyers who litigate and lobbyists who negotiate for wealth transfers rather than work to create new wealth. Economists call this “rent seeking”: the diversion of talent from production toward redistribution.

A long line of empirical and theoretical public choice research argues that a state’s institutions determine how much rent seeking occurs, but there has been limited evidence examining and comparing U.S. states. This brief summarizes new research testing whether economic freedom—particularly constraints on government spending, taxes, and labor market regulation—shapes how much labor a state channels into rent seeking, using employment in private legal services and lobbying as proxies for the size of the “influence economy.” The analysis draws on a 16-year panel of 48 U.S. states (2004–2019), combining the Fraser Institute’s Economic Freedom of North America (EFNA) index with state labor force data.

Key Findings

• More economic freedom is associated with fewer rent-seeking jobs. A one-point increase in a state’s EFNA score (measured on a 0–10 scale) is associated with roughly 230 fewer legal-services jobs and 30 fewer lobbying jobs per million workers—about a 3% and 10% decline, respectively, relative to each occupation’s average share of the workforce. This is a substantial reallocation of skilled labor.
• Government spending is the real driver. Of economic freedom’s three components (government spending, taxes, and labor market freedom), only spending consistently predicts lower rent-seeking employment. States that spend less, and thus have fewer contestable dollars, have smaller legal and lobbying sectors.
• The relationship looks causal, not just correlational. Using neighboring states’ freedom scores and dynamic panel models that account for persistence, the negative link between economic freedom and legal-services employment survives; it even grows larger once reverse causality is addressed, suggesting the baseline estimates are conservative.
• Rent seeking can erode the very institutions that would contain it. States with larger legal-services sectors subsequently see slower gains in economic freedom, consistent with entrenched interests mobilizing to defend privileges once they are established.

Policy Recommendations

1. Reduce spending to reduce rent seeking. A state that pares back its budget, even without touching its tax code or labor law, would therefore see fewer workers pulled into legal and lobbying occupations built around chasing government transfers. The reason is simple: when there are fewer resources to dole out, there is less to lobby and litigate for..
2. Streamline procurement and reduce direct state participation in economic activity. When purchasing goods and services, the state should make the process as streamlined and simple as possible. Simpler procurement rules also reduce the need for specialized legal advice, which levels the playing field: smaller firms that cannot afford expensive legal services become better able to compete with established incumbents for state contracts.
3. Reduce bureaucracy that regulates economic activity and facilitates codes. Legal services thrive in environments of heavy bureaucracy and hard-to-understand legislation. By making legislation simpler for non-lawyers, governments can reduce incentives to join the profession in the first place, freeing that talent for more productive endeavors.

Summary

Economic freedom—especially constraints on the size of government spending—shapes whether entrepreneurial talent is directed toward production or redistribution. Across a 16-year panel of U.S. states, greater economic freedom is associated with fewer workers employed in private legal services and lobbying, the occupations most closely tied to contesting government-created privileges. These relations also run in both directions: entrenched rent seeking can slow future gains in economic freedom by fighting to keep its privileges, reinforcing the case for restraining spending before privileges take hold rather than trying to dismantle them once they exist.

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Source: D’Andrea, Fernando A. M. C., Hugo Vaca Pereira Rocha, Nicholas Jensen, Zachary D. Blizard, and Vitor Melo. 2026. “Economic Freedom and Rent Seeking: Evidence from US States.” Public Choice. https://doi.org/10.1007/s11127-026-01386-6