What is Regulatory Capture

Regulatory capture is an economic theory that says regulatory agencies may come to be dominated by the industries or interests they are charged with regulating. The result is that the agency, which is charged with acting in the public's interest, instead acts in ways that benefit the industry it is supposed to be regulating.

BREAKING DOWN Regulatory Capture

Regulatory capture, also known as the economic theory of regulation, became known in the 1970s due the late George Stigler, a Nobel laureate economist at the University of Chicago, who first defined the term. Stigler noted that regulated industries maintain a keen and immediate interest in influencing regulators, whereas ordinary citizens are less motivated. Thus even though the rules in question, such as pollution standards, often affect citizens in the aggregate, individuals are unlikely to lobby regulators to the degree of regulated industries.

Moreover, regulated industries devote large budgets to influencing regulators at federal, state and local levels. By contrast, individual citizens spend only limited resources to advocate for their rights. Even well-organized groups in favor of tougher regulations, such as the Sierra Club a well-known environmental advocate, garner only modest resources relative to industry interests.

Regulatory Capture and the "Revolving Door"

In many cases the regulators themselves come from the pool of industry experts and employees, who then return to work in the industry after their government service. This is a version of the system known as the “revolving door” between public and private interests. In some cases, industry leaders trade the promise of future jobs for regulatory consideration, making revolving doors criminally corrupt.

Regulatory agencies that come to be controlled by the industries they are charged with regulating are known as captured agencies. Eventually a captured public-interest agency operates essentially as an advocate for the industries they regulate. Such cases may not directly corrupt as there is no quid pro quo; rather, the regulators simply begin thinking like the industries they regulate, due to heavy lobbying.

In the late 19thcentury, as the industrial revolution created vast new wealth, government trade regulators openly advocated for the industries they oversaw. It wasn’t until much later in the 20thcentury that the notion of true public-interest regulation, and thus the problem of regulatory capture, took hold.

Dissent on the Theory of Regulatory Capture

Some economists discount the significance of regulatory capture. They point out that many large industries which lobby regulators, such as industries in the fossil fuel sector, have experienced lower profits due to regulation. Thus, these economists argue, the lobbying efforts have failed to capture agencies.