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Regulatory capture
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Regulatory capture
In politics, regulatory capture (also called agency capture) is a form of corruption of authority that occurs when a political entity, policymaker, or regulator is co-opted to serve the commercial, ideological, or political interests of a minor constituency, such as a particular geographic area, industry, profession, or ideological group.
When regulatory capture occurs, a special interest is prioritized over the general interests of the public, leading to a net loss for society. The theory of client politics is related to that of rent-seeking and political failure; client politics "occurs when most or all of the benefits of a program go to some single, reasonably small interest (e.g., industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers)".
For public choice theorists, regulatory capture occurs because groups or individuals with high-stakes interests in the outcome of policy or regulatory decisions can be expected to focus their resources and energies to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture refers to the actions of interest groups when this is successful at influencing the staff or commission members of the regulator.
... as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit... We propose the general hypothesis: every industry or occupation that has enough political power to utilize the state will seek to control entry. In addition, the regulatory policy will often be so fashioned as to retard the rate of growth of new firms.
Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect the public good. Often cited articles include Bernstein (1955), Huntington (1952), Laffont & Tirole (1991), and Levine & Forrence (1990). The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its major developers.
The likelihood of regulatory capture is a risk to which an agency is exposed by its very nature. This suggests that a regulator should be protected from outside influence as much as possible. Alternatively, it may be better to not create a given agency at all. A captured regulator is often worse than no regulation, because it wields the authority of government. However, increased transparency of the agency may mitigate the effects of capture. Recent evidence suggests that, even in mature democracies with high levels of transparency and media freedom, more extensive and complex regulatory environments are associated with higher levels of corruption (including regulatory capture).
Stigler framed the problem of regulatory capture as "the problem of discovering when and why an industry is able to use the state for its purposes". He focuses on whole industries. But, it is never a whole industry that is 'capturing' its regulators, but only the big companies that, using the tool of the revolving door, 'highjack' the regulator by offering high salaries. Brezis and Cariolle (2019) have shown that the connected firms are always the big firms. Indeed, the top 5 financial companies concentrate around 80% of the stock of revolving door movements and regulatory capture. This leads to inequality of influence among firms in the same sector.
It should also be noted that regulatory capture in developed countries is not anymore related to corruption and illegal behavior, but to abuse of power.
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Regulatory capture
In politics, regulatory capture (also called agency capture) is a form of corruption of authority that occurs when a political entity, policymaker, or regulator is co-opted to serve the commercial, ideological, or political interests of a minor constituency, such as a particular geographic area, industry, profession, or ideological group.
When regulatory capture occurs, a special interest is prioritized over the general interests of the public, leading to a net loss for society. The theory of client politics is related to that of rent-seeking and political failure; client politics "occurs when most or all of the benefits of a program go to some single, reasonably small interest (e.g., industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers)".
For public choice theorists, regulatory capture occurs because groups or individuals with high-stakes interests in the outcome of policy or regulatory decisions can be expected to focus their resources and energies to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture refers to the actions of interest groups when this is successful at influencing the staff or commission members of the regulator.
... as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit... We propose the general hypothesis: every industry or occupation that has enough political power to utilize the state will seek to control entry. In addition, the regulatory policy will often be so fashioned as to retard the rate of growth of new firms.
Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect the public good. Often cited articles include Bernstein (1955), Huntington (1952), Laffont & Tirole (1991), and Levine & Forrence (1990). The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its major developers.
The likelihood of regulatory capture is a risk to which an agency is exposed by its very nature. This suggests that a regulator should be protected from outside influence as much as possible. Alternatively, it may be better to not create a given agency at all. A captured regulator is often worse than no regulation, because it wields the authority of government. However, increased transparency of the agency may mitigate the effects of capture. Recent evidence suggests that, even in mature democracies with high levels of transparency and media freedom, more extensive and complex regulatory environments are associated with higher levels of corruption (including regulatory capture).
Stigler framed the problem of regulatory capture as "the problem of discovering when and why an industry is able to use the state for its purposes". He focuses on whole industries. But, it is never a whole industry that is 'capturing' its regulators, but only the big companies that, using the tool of the revolving door, 'highjack' the regulator by offering high salaries. Brezis and Cariolle (2019) have shown that the connected firms are always the big firms. Indeed, the top 5 financial companies concentrate around 80% of the stock of revolving door movements and regulatory capture. This leads to inequality of influence among firms in the same sector.
It should also be noted that regulatory capture in developed countries is not anymore related to corruption and illegal behavior, but to abuse of power.