Regulatory Capture and Quality

50 Pages Posted: 12 Jun 2015

Multiple version iconThere are 2 versions of this paper

Date Written: June 11, 2015

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

Suggested Citation

Tai, Laurence, Regulatory Capture and Quality (June 11, 2015). Edmond J. Safra Working Papers, No. 66. Available at SSRN: https://ssrn.com/abstract=2617012 or http://dx.doi.org/10.2139/ssrn.2617012
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