Regulatory Capture

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Lore & Background

For public choice theorists, regulatory capture occurs because groups or individuals with high-stakes interests in the outcome of policy or regulatory decisions focus their resources and energies to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake, ignore it. The theory is associated with Nobel laureate economist George Stigler, one of its major developers. Stigler framed the problem as 'the problem of discovering when and why an industry is able to use the state for its purposes.' Brezis and Cariolle (2019) have shown that the connected firms are always the big firms; 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. While regulatory capture in developed countries can involve abuse of power, it may also still involve corruption and illegal behavior.

In Their Own Story

The review of the United States history of regulation at the end of the 19th century, especially the regulation of railway tariffs by the Interstate Commerce Commission (ICC) in 1887, revealed that regulations and market failures are not co-relevant. At least until the 1960s, regulation was developed in the direction of favoring producers, and regulation increased the profits of manufacturers within the industry. In potentially competitive industries such as trucking and taxis, regulations allow higher prices and prevent entrants. In monopoly industries such as electric power generation, there is evidence that regulation has little effect on prices, so the industry can earn excess profits. Evidence shows that regulation is beneficial to producers. Justice Douglas' dissent in Sierra Club v. Morton (1972) describes concern that regulators become too favorable with their regulated industries.

Reader's Guide

There are two basic types of regulatory capture. Materialist capture, also called financial capture, occurs when the captured regulator's motive is based on its material self-interest, resulting from bribery, revolving doors, political donations, political corruption, or the regulator's desire to maintain its funding. Non-materialist capture, also called cognitive capture, can be caused by bias in the representation of public interests, which through consensus decision-making can be adopted by regulatory agencies and law; this can result from interest groups lobbying for the industry. Highly specialized technical industries can pose a risk of cultural capture because the regulating agency typically needs to employ experts in the regulated area, and the pool of such experts typically consists largely of existing or former employees from the regulated industry. While large firms can capture regulators due to their larger material and non-material resources, small firms are more prone to retain capture via a special underdog rhetoric.

Did You Know?

• Regulatory capture theory is associated with Nobel laureate economist George Stigler, one of its major developers.
• Brezis and Cariolle (2019) showed that the top 5 financial companies concentrate around 80% of the stock of revolving door movements and regulatory capture.
• Regulatory capture in developed countries can involve both legal abuse of power and illegal corruption.