What is “Regulatory Capture”?

by on August 20, 2009 · 12 comments

One of my favorite recurring themes here on TLF is the definitional dispute/clarification. We point out where a term has been used in many different ways and explain the positives and negatives of the various behaviors described by that term. I just did this with privacy.

Of course, it is somewhat pointless to argue about the “true” meaning of a term, but that’s not exactly what’s involved here. Yes, we libertarians can lament when terms that used to describe things we believe in, like “liberal,” “freedom,” “rights,” “choice,” etc., get appropriated by others and terms that used to describe things we don’t believe in, like “coercion,” get ascribed to us. There may be some battles we can win, some terms we can hold onto, but these disputes often end up with two ships passing in the night.

But I’m talking about something a little different. Lots of terms that have, or get, normative connotations – that sound like they describe something good (think “democracy”) or bad (think “terrorism”) – get way overbroadened. Speakers use such terms to describe nearly anything (as long as it’s vaguely related to the original meaning) to which the speaker wants to ascribe the good/bad connotation. We here on TLF catalog those various ways such terms have been used – break the term down – and describe which ways are really good and really bad. As I said, I just did this with privacy. If this were a more lawy, as opposed to techy, blog I’d do it with “activism,” one of my pet peeve words. (Maybe I’ll do it anyway; after all, I posted on the best and worst Supreme Court decisions even though they weren’t especially tech-focused.)

But today, it’s “regulatory capture.” We have discussed it a bit recently, including just tonight. Tim Lee did some great posts on it back in the day. It’s definitely a recurring theme here. We seem to have something fairly specific in mind when we use the term. As Tim put it, it is when “established businesses argue in favor of regulations that they perceive as hurting their competitors (often smaller competitors) more than themselves.” Indeed, I argued with a commenter on one of Wayne’s posts that this definition that makes the most sense given the meanings of the words:

Regulatory capture is when businesses capture regulatory actions and use them as tools, backed by the force of government, for imposing burdens on their competitors. Businesses banding together to oppose government intrusion is not “capture.” Fighting an enemy is not the same as capturing him and using him to do your bidding…

Call Tim’s and my definition the “appropriation” definition.

As I pointed out, however, others (in particular, fans of regulation) seem to think of “regulatory capture” as being – or at least including – when businesses use their connections with regulators to try to get the regulators to stop regulating. Call this the “abdication” definition.

There’s another sense, too, that’s an even more direct form of capture than appropriation – where businesses try to win government contracts or other favors for themselves (as opposed to trying to get new regulations to hurt their competitors). The defense industry is infamous for this, but it’s of course all over the place. Call this the “bribery” definition, since it basically describes bribery, broadly defined.

What makes these forms of regulatory capture happen? What are their effects? Should any be celebrated or all condemned?

Of course, Iron Triangles are a big part of what makes all forms of regulatory capture possible. Iron triangles are complex webs, of course, but I’m most familiar with the relatively simple example of lawyers going back and forth between government agencies (or the DoJ) and private firms. For example, a tax firm would sensibly love to hire someone who has worked at the IRS or Treasury and knows its internal procedures and thought processes. Relations develop from these revolving doors, of course. But what incentives do the regulators have to listen to their former colleagues, now working for the businesses they regulate? Well, this depends on what the businesses want.

In the case of bribery, they want contracts or other favors and can offer regulators bribes in exchange. That’s pretty simple. But it’s also pretty illegal, and so this is hardly the worst problem in terms of scope that comes from regulatory capture.

In the case of appropriation, it’s a little more subtle. Say AMD wants to disadvantage its big competitor, Intel, but without having to, you know, make better products for less money. Instead, they can go to antitrust regulators and get them to sue the pants off Intel. It costs AMD little. But what do the regulators get? They get to make themselves look great! It’s similar to journalists taking stories from activists – they get their jobs done from them, and in a way that makes them look good. They don’t even have to think of the choice sound bites. (I think we saw this with NebuAd and the regulatory fall-out as companies like Google scrambled to sic the FTC on their competitors.) The regulators can justify their jobs and even expanding their authority as being necessary and can look tough, fighting business, not beholden to it! Of course, they are beholden to one business by fighting another. Not only is this legal, it makes the regulators seem super-diligent. So, we see a lot of this kind of regulatory capture. This is, needless to say, bad. It causes massive deadweight loss. Companies should be fighting in the marketplace, where their wars result in better products at lower prices.

In the case of abdication, however, there is little the business can offer the regulator. The company wants the regulator to do less – to go home and put herself out of a job. Good luck with that sales pitch. If the regulator goes along, she looks like she’s in the pocket of big business and can only justify her actions by reciting true arguments (ugh) about the bad effects of regulation. And those are the same arguments those lobbyists made, so she must just be their puppets (regardless of whether the arguments are right). That’s why we don’t see a lot of successful “regulatory capture” of this type. In fact, it’s a rare cause for celebration when companies even try to get regulations lifted. (There’s a coordination problem from the companies’ perspective too. It’s much less costly to get the DoJ to go after a competitor than to take a stand that benefits the industry as a whole, since there’s a big free rider problem.)

Can anyone think of one big example of this kind of regulatory capture – a situation where a law passed by Congress has been left unenforced because of successful lobbying by businesses? To say the least, this seems much less common than laws being used way beyond their purposes, or even regulatory actions taken without any statutory basis whatsoever, but I’d love to hear counter-examples.

So, maybe – since it doesn’t happen and doesn’t really mesh with the meaning of “capture” – we should not call regulatory abdication “regulatory capture” at all. And we already have a word for “bribery.” (It’s “bribery.”) So, perhaps we could save the term “regulatory capture” for the specific pattern of companies convincing regulators to use their coercion wands to whack competitors.

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