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The Danger of Regulatory Capture

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Regulatory capture occurs when regulatory agencies become dominated by the very industries they were charged with regulating, prompting regulators to advance the goals and interests of those industries. While regulation is necessary and can be done well, it must always be balanced against the potential for unintended consequences that harm the consumers it is intended to protect.

Discussion Questions

  1. What are some solutions to regulatory capture?
  2. What is the source behind regulatory capture?
  3. Is regulatory capture inevitable?

Additional Resources

  • Read John B. Taylor’s blog on “Regulatory Capture and Reckless Endangerment,” available here.
  • Read “Free the Captives” in which Gary S. Becker discusses regulatory capture, available here.
  • In “A Comparison of Government Regulation of Risk in the Financial Services and Nuclear Power Industries,” John B. Taylor and Frank A. Wolak examine and compare the problem of safety and soundness regulation in two industries that have dominated the headlines in recent years—nuclear power and financial services. Available here.
View Transcript

In industries that serve critical needs, it is tempting to turn to regulation as a method of protecting consumers and promoting competition. 

But companies that are regulated have strong financial reasons for lobbying and working closely with their regulators and consulting on the very rules they’ll be governed by. 

What results is a phenomenon called “regulatory capture,” where companies and their regulators develop mutually beneficial relationships by sharing people, resources, and information. 

New rules and regulations are costly to comply with, which often means that only the largest companies can afford them. 

Consequently, regulators actually end up advancing the interests of the companies they are regulating by imposing disproportionate new costs on their competitors. 

After the financial crisis, Dodd-Frank was passed to rein in the biggest banks and prevent future abuses. 

But this law in its original form also made it much more difficult for new banks to enter the market and compete with bigger banks. The unintentional result is a less competitive and more consolidated market that makes consumers worse off. 

Regulation is important and can be done well. 

But it must always be balanced against the potential to harm the consumers it is intended to protect.