Regulatory Capture
When the watchdogs become the wolves, the game changes forever.
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 (e.g., industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers).'
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.
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.
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