Regulatory Capture and Quality

Abstract

Drawing on accounts of regulatory capture in which industry influence activities shift regulators' mindsets apart from incentives or information, this paper develops a formal model of capture as a shift in a policymaking agent’s preferences, due to costly actions by the industry. One type of action is rent-seeking that produces only capture, while the other type also improves regulatory quality by producing information that reduces policy uncertainty. The model shows how the ability to capture the agent can incentivize the interest group to produce more information. Thus, aligning an agent’s preferences with a political principal’s and immunizing him from capture is not generally optimal; instead, the principal prefers an agent who is susceptible to capture associated with quality improvements but also initially more opposed to the group than the principal. Examples from financial regulation are provided as empirical support for the model.

Keywords: institutional corruption, regulatory capture, information, rent-seeking, industry influence, lobbying, financial regulation

JEL Classification: D72, D73, K23