Closing the Revolving Door

Abstract

Regulators can leave their government position for a job in a regulated firm. Using granular payroll data on 2.4 million federal employees, we uncover a strategic behavior of regulators seeking to preserve their private sector job opportunities. We exploit the fact that several post-employment restrictions, which diminish the regulator's outside option, trigger when the regulator's salary exceeds a threshold. As strategic regulators get closer to the threshold, they accept fewer promotions and pay raises, and they are more likely to quit and to transition to the lobbying industry. In some agencies, we detect a significant bunching of strategic regulators just below the threshold. Consistent with theories of regulatory capture, strategic regulators initiate fewer enforcement actions and develop fewer new regulations. Using our findings to calibrate a structural model, we show that eliminating the restriction will increase the incentive distortion in the federal government by 3.2%. Combined, our results shed new light on the economic implications of the revolving door in the government. 

Keywords: revolving doors, regulatory burden, bunching estimation, compensation incentives