Regulatory capture

From Wikipedia, the free encyclopedia

This article may require cleanup to meet Wikipedia's quality standards. Please improve this article if you can. (April 2007)

Regulatory capture is a phenomenon in which a government regulatory agency which is supposed to be acting in the public interest becomes dominated by the vested interests of the existing incumbents in the industry that it oversees.

In public choice theory, regulatory capture arises from the fact that vested interests have a concentrated stake in the outcomes of political decisions, thus ensuring that they will find means - direct or indirect - to capture decision makers.

The concept is central in a branch of public choice that is often referred to as the "economics of regulation", which is critical of earlier conceptualizations of regulatory intervention by governments as being motivated to protect public goods. Two often cited articles are Laffont & Tirole (1991) and Levine & Forrence (1990).

The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers.

Contents 1 Economic Rationale 2 Examples 3 See also 4 Links 5 Footnotes 6 References

[edit] Economic Rationale

The idea of regulatory capture has an obvious economic basis in that vested interests in an industry have the greatest financial stake in regulatory activity and are likely to be less hindered by collective action problems that might riddle those affected by regulation (like dispersed consumers each of whom has little particular incentive to try to influence regulators). As well, we would expect that when regulators form expert bodies to examine policy, this will invariably feature current or former industry members, or at the very least, individuals with contacts in the industry.

[edit] Examples

Historians, political scientists, and economists have used the Interstate Commerce Commission (ICC), a federal regulatory body in the United States, as a classic example of regulatory capture. The creation of the ICC was the result of widespread and longstanding anti-railroad agitation, but the Commission was later accused of acting in the interests of railroads and trucking companies. The ICC, they claimed, set rates at artificially high levels and excluded new competitors through a restrictive permitting process.

[edit] See also

• Corporate welfare
• Government failure
• Iron triangle
• Rent seeking
• Capture (politics)
• Revolving door (politics)

[edit] Links

• Regulatory Capture: Causes and Effects

[edit] Footnotes

[edit] References

• Stigler, G. 1971. The theory of economic regulation. Bell J. Econ. Man. Sci. 2:3-21.
• Laffont, J. J., & Tirole, J. 1991. The politics of government decision making. A theory of regulatory capture. Quarterly Journal of Economics, 106(4): 1089-1127
• Lee, Timothy B. (2006-08-03). Entangling the Web. New York Times. Retrieved on 2007-06-19.
• Levine, M. E., & Forrence, J. L. 1990. Regulatory capture, public interest, and the public agenda. Toward a synthesis. Journal of Law Economics & Organization, 6: 167-198