Regulatory capture

Regulatory capture is a term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating.

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public with only a tiny stake in the outcome will ignore it altogether. When this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of a regulatory agency so that the preferred policy outcomes of the special interest are implemented, then regulatory capture has occurred.

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 regulatory intervention by governments as being motivated to protect public goods. Two often cited articles are Laffont & Tirole (1991) and Levine & Forrence (1990).

The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers. Two other cited references are Bernstein (1955) and Huntington (1952).

Economic rationale

The idea of regulatory capture has an obvious economic basis in that vested interests in an industry have the greatest financial stake in regulatory activity and are likely to be less hindered by collective action problems that might riddle those affected by regulation (like dispersed consumers each of whom has little particular incentive to try to influence regulators). As well, we would expect that when regulators form expert bodies to examine policy, this will invariably feature current or former industry members, or at the very least, individuals with contacts in the industry.

Examples

Historians, political scientists, and economists have used the Interstate Commerce Commission (ICC), a federal regulatory body in the United States, as a classic example of regulatory capture. The creation of the ICC was the result of widespread and longstanding anti-railroad agitation, but the Commission was later accused of acting in the interests of railroads and trucking companies. The ICC, they claimed, set rates at artificially high levels and excluded new competitors through a restrictive permitting process.

See also

• Corporate welfare
• Government failure
• Iron triangle
• Rent seeking
• Capture (politics)
• Revolving door (politics)

References

• Stigler, G. 1971. The theory of economic regulation. Bell J. Econ. Man. Sci. 2:3-21.
• Laffont, J. J., & Tirole, J. 1991. The politics of government decision making. A theory of regulatory capture. Quarterly Journal of Economics 106(4): 1089-1127
• Bernstein, M. 1955. Regulating Business by Independent Commission. Princeton: Princeton University Press.
• Huntington, S. 1952. The Marasmus of the ICC: The Commission, the Railroads, and the Public Interest. Yale Law Journal 614:467-509.
• Lee, Timothy B. (2006-08-03). "Entangling the Web". New York Times. Retrieved 2007-06-19. {{cite web}}: Check date values in: |date= (help)
• Levine, M. E., & Forrence, J. L. 1990. Regulatory capture, public interest, and the public agenda. Toward a synthesis. Journal of Law Economics & Organization 6: 167-198

External links

• Regulatory Capture: Causes and Effects