Thursday, September 11, 2008

Capture Theory at Work

The capture theory of regulation is demonstrated wonderfully in the following report by CNN, the lesson of which is that regulatory agencies almost inevitably begin to work on the behalf of the industry they are intended to regulate:
U.S. government employees received improper gifts from energy industry representatives, and engaged with them in illegal drug use and inappropriate sexual relations, according to a report issued Wednesday.
Some of the government employees tried to hide their close association with the industry they were supposed to be regulating, the report says.
Regulation provides a new avenue for industries to compete, one that occurs through the political process. If you are new to capture theory, here are the reasons why, even if you agree with the idea of regulating, it is so hard to implement in practice:
  1. Q: Where will you find the regulators, who will be required to have an in-depth understanding of the industry you are regulating? A: The existing firms in the industry.
  2. Q: Where will the regulators go when their time with the agency is done? A: Given their in-depth understanding of the energy industry, their highest earning potential will be a firm they used to regulate. What kind of reputation will they want to have going into that job market?
  3. The industry actors care a great deal about the impact of regulations. Outsiders have many other things to care about, with very little at stake concerning the impact of regulators. Over a fixed interval of time, who will fight the hardest in this political process? The ones with the most on the line.
  4. Firm's have a long time horizon, at least as long as a young person's career and much longer than a politician. For a fixed level of interest in the outcomes, who will invest the most in ensuring the regulations play favorably with the industry interests? The ones with the longer time horizon.
Transgressions like the one cited in this study demonstrates how far things have to go before capturing if paused, and the halt will only be temporary. Regulation is a losing game, even if you agree with the objectives.

Here is a link to the EconTalk with Sam Peltzman.

No comments: