Regulatory capture

Definition

Regulatory capture refers to a phenomenon where regulatory agencies whose stated purpose is to rein in specific economic actors get captured by those specific economic actors, and start advocating for those actors and their interests rather than the public interest.

Aspects of regulatory capture

• In some cases, regulatory capture simply returns the economy to an unregulated scenario: the regulatory agency fails to implement its regulations, or repeals them. In such cases, regulatory capture is about as good or bad as the unregulated scenario, with the main disadvantage relative to the unregulated scenario being the resources wasted in setting up the agency and the resources used in capturing it. Whether it is better or worse than the scenario of uncaptured regulation depends on whether the regulation itself was bad or good.
• In some cases, the regulatory capture is partial -- the regulatory agency is captured by a subset of the economic actors it intends to regulate, and as a result, it creates regulations that favor that subset of actors to the detriment of other actors influenced by the regulations. For instance, a regulatory agency set up to regulate the paper industry may get captured by a few of the biggest paper companies, and introduce legislation that makes it harder for their competitors or potential competitors. This scenario may well be worse than both an unregulated scenario and an uncaptured regulated scenario.

Explanations for regulatory capture

In public choice theory, regulatory capture is explained based on the theory of concentrated benefits and diffuse costs: the economic actors being regulated have a lot at stake, and therefore are willing to invest resources into capturing the regulatory agency. On the other hand, the general public, whose interest the regulatory agency is supposed to look out for, is too diffuse. Most individual members of the general public have very little at stake, and they therefore face a collective action problem of pooling together to oversee the regulatory agency and prevent it from getting captured.

This explanation suggests that regulatory capture is less of a problem where there are specific economic actors who stand to benefit a lot from the regulatory activity of the regulatory agency. For instance, if there are some big companies that spend huge sums of money purchasing computer hardware, then they have an interest in making sure that a regulatory agency intended to check the power of computer hardware manufacturers does not shirk its responsibility.