Regulatory capture
In politics, regulatory 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 but most or all of the costs will be borne by a large number of people ".
Theory
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.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, Huntington, Laffont & Tirole, and Levine & Forrence. 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.
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 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.
Types
There are two basic types of regulatory capture:- Materialist capture, also called financial capture, in which the captured regulator's motive is based on its material self-interest. This can result 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.
Relationship with federalism
There is substantial academic literature suggesting that smaller government units are easier for small, concentrated industries to capture than large ones. For example, a group of states or provinces with a large timber industry might have their legislature and/or their delegation to the national legislature captured by lumber companies. These states or provinces then become the voice of the industry, even to the point of blocking national policies that would be preferred by the majority across the whole country. Moore and Giovinazzo call this the "distortion gap".The opposite is possible. Very large and powerful industries can capture national governments, and then use that power to block policies at the national, state or provincial level that the voters may want, although even local interests can thwart national priorities.
Economic rationale
Regulatory capture has an economic basis: vested interests in an industry have the greatest financial stake in regulations affecting them, and so are more likely to try to influence the regulator than relatively dispersed individual consumers, each with little incentive. When regulators form expert bodies to examine policy, these invariably feature current or former industry members, or at the very least, individuals with lives and contacts in the industry. Capture is also facilitated where consumers or taxpayers have a poorer understanding of underlying issues than businesses.Jon Hanson and his co-authors argue that the phenomenon extends beyond political agencies and organizations. Businesses have an incentive to control anything that has power over them, including the media, academia and popular culture, and will try to capture them too. This is called "deep capture".
Regulatory public interest is based on market failure and welfare economics. It holds that regulation is the response of the government to public needs. Its purpose is to make up for market failures, improve the efficiency of resource allocation, and maximize social welfare. Posner states that the public interest theory contains the assumption that the market is fragile, and that if left unchecked, it will tend to be unfair and inefficient, and government regulation is a costless and effective way to meet the needs of social justice and efficiency. Mimik states that government regulation is a public administration policy that focuses on private behavior. It is a rule drawn from the public interest. Irving and Brouhingan state that regulation is a way of obeying public needs and weakening the risk of market operations. They also expressed the view that regulation reflects the public interest.
History
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 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.These observations led to the emergence and development of regulatory capture theory. Contrary to regulatory public interest theory, this holds that the provision of regulation adapts to the industry's needs, that is, both the legislator and regulator are controlled and captured by the industry. The basic view of the theory is that the regulator gets captured no matter how the regulatory scheme is designed. The implication is that regulation increases the industry's profits rather than the social welfare.
This was essentially a purely capture theory in the early days, that is, the regulators and legislators were captured and controlled by the industry. Later regulatory models, such as those by Stigler, Pelzmann, or Becker, follow the regulatory capture theory in the eyes of Posner and others. All these models reflect that regulators and legislators are trying to maximize private, not public, interests. They use the "private interest" theory to explain the origin and purpose of regulation. Aton argues that Stigler's theoretical logic is clearer and more central than the previous "capture theory" hypothesis, but it is difficult to distinguish between the two.
Regulatory capture theory has a specific meaning, that is, an experience statement that regulations are beneficial for producers in real life. So it is essentially not a true regulatory theory. Although the analysis results are similar to the Stigler model, the methods are completely different. Stigler used standard economic analysis methods to analyze the regulation behavior, then created a new regulatory theory – regulatory economic theory. Of course, different divisions depend on the criteria for division, and they essentially depend on the researchers' different understanding of specific concepts.
Justice Douglas' dissent in Sierra Club v. Morton describes concern that regulators become too favorable with their regulated industries.
Examples
Europe
Aberfan disaster
On 21 October 1966, a tip containing spoil and tailings from Merthyr Vale Colliery slipped after a period of heavy rain, killing 116 children and 28 adults in the Welsh village of Aberfan. In contravention of the National Coal Board's procedures, the tip was partly based on the ground from which water springs were known to emerge. After three weeks of rain, the tip became saturated and of spoil and tailings slipped down the side of the hill, engulfing Pantglas Junior School and a row of houses.Iain McLean and Martin Johnes, in a 2000 study of the Aberfan disaster, observed that Her Majesty's Inspectorate of Mines went largely unchallenged by the tribunal, although the two consider that the organisation failed in its duty, falling in line with the interests of the National Coal Board whose activities they were supposed to be overseeing.