Regulatory Capture

Regulatory capture refers to the phenomenon of government agencies, created initially to serve the public interest, serving instead the interests of the companies and industries they regulate, as a result of deliberate efforts on the part of those companies and regulators to co-opt the agencies. For example, taxi regulations that are ostensibly aimed at protecting the riding public, but serve mainly to raise barriers to entry into the taxi market, are sometimes alleged to evidence the ‘capture’ of municipal taxi commissions by incumbent taxi license holders. Research in regulatory capture seeks both to explain why and how capture occurs and to document historical instances of capture.

Regulatory capture can be thought of as both a state of affairs and a process. As a state of affairs, a regulatory body is said to “be captured” when it is dominated by a particular company or industry; its regulations reflecting the interests of that company or industry, instead of (for example) the interests of consumers or the public at large. As a process, regulatory capture refers the strategies and tactics by which companies or industries pursue the co-option of their regulators.

The motivation for a company or industry to attempt capture of a regulatory agency is mainly economic. A company may seek to capture a regulatory agency in order gain a competitive advantage over its rivals. An industry may seek to capture a regulatory agency in order to entrench incumbent companies in the industry and raise barriers to entry by upstart competitors. Regulatory agencies are thought to be most susceptible to capture when the benefits of capture are highly concentrated (companies can be made substantially wealthier by securing regulatory rules most advantageous to them) and the costs are widely dispersed among the public (regulatory rules make many individual persons pay small sums of money to enrich the companies). For example, in the United States, tariffs on imported sugar make consumers pay roughly three times the world market price for sugar. Consumers each pay a few extra dollars per year for the sugar they consume, but this means millions of dollars for a handful of domestic sugar producers.

Methods of pursuing or maintaining regulatory capture include ordinary political activities such as lobbying. However, it is widely believed that among the most effective tools of pursuing or maintaining regulatory capture is establishing a so-called “revolving door” of employment between a regulatory agency and the companies that agency regulates. Regulators may look forward to lucrative future employment in a regulated company, and regulated companies provide candidates for political appointment to fill open seats on regulatory panels. Government ethics or conflict-of-interest rules that prohibit for a period of time lobbying or appearing before regulatory agencies that one has served on are attempts to upset the smooth operation of the revolving door and immunize the regulatory agency from capture.

Although material capture (providing tangible rewards to regulators for doing things a company’s or industry’s way) is the most common form of regulatory capture discussed, a perhaps more complete and stable form is what is sometimes called cognitive or cultural capture, in which regulators come to view the world through the eyes of the regulated company or industry. This might happen through mechanisms as simple as meeting frequently in professional contexts: people who see each other frequently may start to see each other as friends, rather than adversaries, an effect that can dull the critical perspective of a regulator.

See also in CEBE:

Further Reading:

By Chris MacDonald and Alexei Marcoux
© The Journal Review Foundation of the Americas