In countries with poorly developed institutions, rent seeking may impose serious costs for the economy. Our analysis demonstrates how rent seeking distorts the economy through two channels. First, there is the direct cost of the resources wasted in the rent seeking contest. Second, rent seeking distorts firms’ investment decisions, and leads to underinvestment. We conduct a case study of rent seeking in Iran in order to gain a better understanding of the phenomenon. Iran is an interesting case, both because it is a rentier economy in the oil rich Middle East, and because its political system is highly factionalized.