Regulatory Capture Explained: 3 Regulatory Capture Examples

Regulatory capture refers to the process by which regulatory industries end up doing the bidding of the very industries they have an intrinsic duty to regulate. These industries might use both legal (although ethically dubious) and illegal means to influence regulatory bodies. This process can prove to be as common in democracies as in dictatorships.

George Stigler, a Nobel laureate and prominent economist of the mid-twentieth century, is the father of regulatory capture theory. Since his initial findings, other economists like Adam A. Posner, Daniel Carpenter, David A. Moss, Ernesto Dal Bó, and Marver Bernstein have made contributions of their own as to how this sort of corruption occurs as well as how to prevent it.

Regulated industries have a propensity to influence the regulatory agencies that exist to keep them in check. Here are some of the reasons why regulatory capture occurs:

• Average people have fewer resources. Government agencies receive a charter to protect the interests of average citizens, but normal people do not have the same resources to advocate for themselves as special interest groups do. Well-funded industries turn to lobbying as a means to influence which regulations they face, even at the expense of the run-of-the-mill consumer.
• Close relationships develop. Regulators have an intimate working relationship with people from the industries they regulate. As time goes by, they might feel close personal ties to people with a vested interest in the deregulation of a specific industry. These sorts of relationships can make ethical decision-making more difficult for regulators.
• Industries offer favors. Companies will offer explicit and implicit favors to regulators who go easy on their industries. Outright bribes are less common than more oblique conflicts of interest. For instance, rather than offering a large sum of money for favorable policymaking, there might be an understanding the regulator could come to work for a company if they ever leave their government job. Senators and congresspeople can be as guilty of this sort of rent-seeking as administrative regulators can be.
• Regulators come from regulated industries. There’s often a revolving door between regulatory agencies and regulated industries. This is due, at least in theory, to the fact it’s easier to regulate something if you know how it works from the inside. In practice, this often leads to legislators and regulators offering favors to or withholding penalties from the industries they now oversee.

Economists differ on the inevitability of regulatory capture. Some point to the successes of regulatory bodies in addressing market failures or breaking up monopolies through antitrust actions as proof these institutions can operate without corruption and achieve their stated goals.

Others consider these situations outliers and look more closely at the ways the same groups have failed in achieving their mandates. Ironically, preventing regulatory capture likely requires regulating the regulators themselves.

Regulatory capture has occurred in different sectors of the economy throughout history. Consider these three examples of regulatory bodies failing to perform their duties:

1. 1. Environmental regulations: Public policy can shift from one administration to the next with regard to the environment. Some assert the EPA (the US Environmental Protection Agency) has fallen under the sway of private interest groups funded by the fossil fuel industries when the administration in power denies the effect of carbon emissions on climate change. As with many instances of regulatory capture, it can be difficult to prove such an accusation.
2. 2. Financial services: During the financial crisis of 2008, critics asserted the United States’s financial regulatory agencies worked against the public interest. They pointed to the deregulation of the financial sector that led to the housing bubble and subprime lending, as well as to the Federal Reserve of New York turning a blind eye to the unscrupulous activities of certain Wall Street banks.
3. 3. Transportation agencies: After the Interstate Commerce Act went into effect in the late nineteenth century, railroad barons overtook the Interstate Commerce Commission (ICC) the act had formed. In this classic example of regulatory capture, rail magnates shaped the very regulations that existed to keep them in check and operated as a private cartel of sorts. Trucking companies did the same thing in the twentieth century.

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