Regulatory capture

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Regulatory capture is a term used to refer to situations in which a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities.

For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture is when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented.

Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect public good. Often cited articles include Bernstein (1955), Huntington (1952), Laffont & Tirole (1991), and Levine & Forrence (1990). The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers.

The risk of regulatory capture suggests that regulatory agencies should be protected from outside influence as much as possible, or else not created at all. A captured regulatory agency that serves the interests of its invested patrons with the power of the government behind it is often worse than no regulation whatsoever.

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[edit] Economic rationale

The idea of regulatory capture has an obvious economic basis in that vested interests in an industry have the greatest financial stake in regulatory activity and are likely to be less hindered by collective action problems that might riddle those affected by regulation (like dispersed consumers each of whom has little particular incentive to try to influence regulators). As well, we would expect that when regulators form expert bodies to examine policy, this will invariably feature current or former industry members, or at the very least, individuals with contacts in the industry.

Some economists, such as Jon Hanson and his co-authors, argue that the phenomenon extends beyond just political agencies and organizations. Businesses have an incentive to control anything that has power over them, including institutions from the media to academia to popular culture, and thus will try to capture them as well. When this happens, they call this phenomenon "deep capture."[1]

[edit] Examples

Historians, political scientists, and economists have used the Interstate Commerce Commission (ICC), a federal regulatory body in the United States, as a classic example of regulatory capture. The creation of the ICC was the result of widespread and longstanding anti-railroad agitation, but the Commission was later accused of acting in the interests of railroads and trucking companies. The ICC, they claimed, set rates at artificially high levels and excluded new competitors through a restrictive permitting process.[2]

In Canada, the words "Engineer" and "Engineering" are trademarked[3] along with the phrase "Professional Engineer". No person may offer engineering services or call himself an engineer without first certifying with the Engineering Association in the province in which he wishes to practice. These Engineering Associations are self-regulating private agencies, chartered by the several provinces, whose mandates have the force of law. Barriers to entry for applicants from outside the province of application are made quite high.

The academic Thomas Alured Faunce has argued the World Trade Organisation Non-violation nullification of benefits claims, particularly when inserted in bilateral trade agreements, can facilitate intense lobbying by industry which can result in effective regulatory capture of large areas of governmental policy.[4]

The United States Food and Drug Administration has also been accused of acting in the interests of the agricultural, food and pharmaceutical industries (and supporting monopolies) at the expense of consumer health interests.

Another illustration of a possibly captured agency is the Federal Aviation Administration. The FAA has a dual-mandate both to promote aviation and to regulate its safety; it called airlines its "customers" until September 2009, when its administrator issued a directive mandating that the agency use the term only to refer to the flying public.[5]

[edit] Quotes

Richard Olney, the US Attorney General circa 1889, opined upon the Interstate Commerce Commission: "The Commission is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, while at the same time that supervision is almost entirely nominal."[6]

In 1913 Woodrow Wilson wrote: "If the government is to tell big business men how to run their business, then don't you see that big business men have to get closer to the government even than they are now? Don't you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it."[7]

[edit] See also

[edit] References

  1. ^ Jon Hanson & David Yosifon, The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture, 152 U. Pa. L. Rev. 129 (2003).
  2. ^ Free to Choose, Milton Friedman
  3. ^ Canadian Intellectual Property Office Trademarks Database [1]
  4. ^ Faunce TA, Neville W and Anton Wasson A. Non Violation Nullification of Benefit Claims: Opportunities and Dilemmas in a Rule-Based WTO Dispute Settlement System in Bray M (ed) Ten Years of WTO Dispute Settlement: Australian Perspectives. Office of Trade Negotiations of the Department of Foreign Affairs and Trade.Commonwealth of Australia. 123-140
  5. ^ Reuters (2009-09-18). "FAA will stop calling airlines 'customers'". USA Today. http://www.usatoday.com/travel/flights/2009-09-17-faa-airline-customers_N.htm. Retrieved 2009-10-17. 
  6. ^ Thomas Frank, "Obama and 'Regulatory Capture'" The Wall Street Journal, June 24, 2009.
  7. ^ Woodrow Wilson, The New Freedom: A Call For the Emancipation of the Generous Energies of a People

[edit] Bibilography

[edit] External links

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