Capital Ideas is now Chicago Booth Review but unfortunately original articles are no longer available. If you click through you will be taken to the Internet Archive site to find an archived copy.
Late Chicago Booth Professor (and Nobel Laureate) George Stigler pioneered the concept of regulatory capture. In simple words, regulatory capture exists when a regulatory agency, created to act in the public interest, ends up advancing interests of the industry it is charged with regulating. Since Stigler, when economists talk about regulatory capture, they do not imply that regulators are corrupt or lack integrity. In fact, if regulatory capture were just due to illegal behavior, it would be easier to fight. Regulatory capture is so pervasive precisely because it is driven by standard economic incentives, which push even the most well-intentioned regulators to cater to the interest of the regulated.
These incentives are built into their positions. Regulators depend on the regulated for much of the information they need to do their job properly, and this dependency encourages regulators to cater to the regulated. The regulated are also perhaps the primary audience of the regulators, as taxpayers and other citizens have much less incentive to monitor regulation, and generally remain ignorant. Hence the regulators will tend to perform their job with the regulated, rather than the public, in mind, further encouraging the regulators to cater to the interests of the regulated. Finally, career incentives play a big role. The regulators’ human capital is highly industry specific, and many of the best jobs available to them exist within the industries they regulate. Thus, the desire to preserve future career options makes it difficult for the regulator not to cater to the regulated.
If these are significant reasons regulators are captured, it is not clear why we economists should not be similarly susceptible to capture.
Click to Add the First »