Regulatory Capture Definition Review Example How To Prevent

Regulatory Capture Definition

The negative phenomenon of regulatory agencies’ bias toward interest groups detrimental to society is also known as the economic theory of regulation or capture theory. When special interest groups or monopolies manipulate the regulatory agencies instead of accepting and functioning under their rulings, corruption will spread in society.

Regulatory Capture Theory Explained

The regulatory capture concept was popularized by the American economist George Joseph Stigler by developing the Economic Theory of Regulation (1971). It describes an example of private entity influence in public regulation. It occurs when the independent regulatory agencies develop a leaning toward their clients’ views and interests.

Key Takeaways

Regulatory capture review points to regulatory agencies responsible for supervising specific markets, industries, or domains getting influenced or directed by the special interest groups in the industries or domains.American economist George Joseph Stigler is one of the main contributors to the theory.Examples include big tech giants spending millions to influence the government through funding academic research.Government can prevent it by analyzing the regulations, removing unnecessary regulations, and evaluating regulatory bodies’ activities using watchdog services.

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The impact of regulatory capture can cause barriers to the entry of new innovative start-ups. Regulations and regulatory bodies are sometimes boons to big firms or the incumbents of a regulated market and complex for new entrants or start-ups. The big firms or the rent-seekers already maintain successful existing business models complying with regulations. It is easy for rent-seekers to lobby against the new entrants by advocating for reasons like public safety and lack of quality reasons.

Another important situation associated with this is the revolving door phenomenon. In which the professionals revolve around becoming regulators and joining the big companies they were assigned with the responsibility to regulate in the past. The big companies offer high salaries to attract the regulators.

Example

The costs of complying with laws may be handled far more readily by large corporations than by small businesses. They are powerful and embrace government regulation and lawsuits to keep new competitors who could challenge their business models at bay.

How to Prevent Regulatory Capture?

To prevent the negative phenomenon, governments can employ diverse methods. The establishment of systems and procedures should be transparent with a fair amount of monitoring. The policymakers should study the costs and benefits of regulation to understand the need for regulations and regulatory bodies. Furthermore, utilizing periodic service of watchdog groups is another effective prevention method.

One of the examples of using a watchdog service is the utilization of the GAO service. In the U.S., Government Accountability Office (GAO) is a federal watchdog agency providing fact-based, nonpartisan information to Congress. The supreme audit institution of the federal government investigates federal spending and performance.

The GAO’s investigative work focuses on how public funds are used, the U.S. housing finance system’s structure, and the federal government’s ongoing conservatorship of Fannie Mae and Freddie Mac. Present examination report on whether the Federal Reserve’s role in payments systems presents a conflict of interest, how the Office of Financial Research uses its resources, how the government has used fines collected from banks related to the mortgage crisis, and an investigation into the SEC’s personnel management practices. The GAO has expanded an investigation into whether the Federal Reserve has been too soft on Wall Street banks.