A Theory of Soft Capture

25 Pages Posted: 5 Jun 2012

See all articles by Per J. Agrell

Per J. Agrell

Louvain School of Management (LSM); Center for Operations Research and Econometrics (CORE)

Axel Gautier

University of Liège - Research Center on Public and Population Economics; Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE)

Date Written: June 5, 2012

Abstract

Capture of regulatory agencies by firms or other stakeholders has given rise to a rich literature, much of which is dominated by models in which the motivation for the welfare-reducing behavior is found in side-contracting (bribes, corruption), threats (blackmail, political support) or corresponding mechanisms for repeated games (reputation, career concerns, signaling for promotion). Notwithstanding, the empirical support for monetary corruption and 'revolving doors' is scarce and inconclusive. We propose an alternative and more intuitive model for regulatory capture that is based on information transmission and asymmetric information. In a three-tier model, a regulator is charged by a political principal to provide a signal for the type of a regulated firm. Only the firm can observe his type and the production of a correlated signal with a given accuracy is costly for the regulator. The firm can costlessly provide an alternative signal of lower accuracy that is presented to the regulator. In a self-enforcing equilibrium, the regulator transmits the firm-produced signal, internalizes its own savings in information cost and the firm enjoys higher information rents. The main feature of soft capture is that it is not based on a reciprocity of favors but on a congruence of interests between the firm and the regulator.

Keywords: Regulation, Capture, Information

JEL Classification: D72, L51

Suggested Citation

Agrell, Per J. and Gautier, Axel, A Theory of Soft Capture (June 5, 2012). Available at SSRN: https://ssrn.com/abstract=2077661 or http://dx.doi.org/10.2139/ssrn.2077661

Per J. Agrell

Louvain School of Management (LSM) ( email )

Université catholique de Louvain
1 place des doyens
Louvain-la-Neuve, BE 1348
Belgium

HOME PAGE: http://www.uclouvain.be/ilsm

Center for Operations Research and Econometrics (CORE) ( email )

Université catholique de Louvain
34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, BE 1348
Belgium

HOME PAGE: http://www.uclouvain.be/core

Axel Gautier (Contact Author)

University of Liège - Research Center on Public and Population Economics ( email )

Boulevard du Rectorat, 7, Batiment 31
Sart-Tilman
B-4000 Liege, 4000
Belgium

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium
+32-10-47.43.01 (Fax)

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