Seen and Heard: David Moss on Regulatory Capture

Gary Bains

Professor David Moss—the John G. McLean Professor at Harvard Business School—lectured on regulator capture and the prevention or mitigation of this phenomenon on January 14, 2013 at the Centre for Ethics at the University of Toronto in association with the School of Public Policy and Governance. Moss prefaced the lecture by emphasizing that most literature on regulatory capture does little to shed light on prevention and treatment mechanisms.

Working on the Tobin Project, a non-profit research organization, Moss and other scholars have tried to move beyond the Chicago School model on regulation. For a long time regulation has been seen as a way to fix market failure. But in 1960s there was a shift in the literature as the discussion began to focus on government failure; Chicago School models influenced this shift.

In the wake of the financial crisis lawmakers wanted to create regulatory agencies to prevent systematic risk. But lawmakers wanted to know: how would you prevent these agencies from being captured from the industry that it is regulating?

Preventing Regulatory Capture: Special Interest Influence and How to Limit It, edited by Dan Carpenter and David Moss, goes into greater detail on the issue of regulator capture, where it occurs, and what can be done about it. Moss explained the core arguments presented in Preventing Regulatory Capture.

The existing literature on regulatory capture often shows itself in black and white terms. Scholars like George Stigler, one of the founders of this field, viewed capture as almost inevitable by industry; industry will grab it, and turn it to its advantage. The best thing, therefore, is to get rid of the regulation. In his view entry barriers would be created to keep out competitors. Moss suggests that capture exists on a spectrum, and some industries are more captured than others. He makes a distinction between strong and weak capture. Strong capture refers to the old model of regulatory capture presented by Stigler; capture is so strong that the resulting regulations is a net-detriment to society (society would be better off without it). Moss suggests another possibility, which he thinks is more common, which is weak capture. Here, industry influence is present, but it does not bend regulation so far that it is a net-detriment to society. When looking at examples of strong capture, they tend to be hard to find. Weak capture, by contrast, appears to be wide-spread.

Past studies have set a low bar for finding a capture, making it impossible not to find it. George Stigler guided people in this direction; he said that to find who influenced the policy one must only look for those that benefited the most. But Moss says that in his view, this logic is not sufficient to say capture occurred because there are always winners and losers from any government regulation. If you believe the winners always captured regulation, then there will always be capture because there are always winners.

Moreover, capture itself takes many varieties. The spectrum view suggests that capture could look a lot like Stigler’s view of entry barrier regulation. But it turns out that there is a variety of capture; it is not one-dimensional. The standard view is that industries offer inducements (such as bribes or hints that you might have a job after you leave a regulatory agency) to bend regulation. Under this standard view industry wants a barrier to entry to be put in place. But if you look at what an industry wants in a regulatory process, it is rare they want more regulation (entry barriers); it is more often the case that they want less regulations. This form of capture is referred to as ‘corrosive capture’, where industry tries to erode existing regulations. Another form is ‘cultural capture’; as an example, the financial industry has influenced the world view of regulators, such that regulators have come to see that interests of the financial industry is in the interest of the public.

Finally, a number of the authors in Preventing Regulatory Capture looked closely at regulatory agencies; comparing across agencies they discovered why capture is not inevitable or absolute, and why there is a spectrum. There are many preventive mechanisms already in place. It’s as if the regulatory system has an immune system from capture, but it is not perfect. These can take the forms of placement of a judicial review, for example, which makes capture more difficult.

There are many options in dealing with capture besides de-regulation. The view originally was that if regulation is corrupt, then the answer is to get rid of regulation. The strongest thinkers in the area of capture were strong proponents of deregulation. This can be the proper course of action in some cases. If you have a case of strong capture where regulation is a detriment to society then it is reasonable to consider deregulation. If it is not a net-detriment, then it is more difficult to argue for deregulation. However, policy makers must ask if there are other tools that can be used to mitigate the problem. In the US there exists a knee-jerk response to capture: that as soon as it exists the discussion automatically turns to the removal regulation. Moss argues that a full range of options needs to be considered.

Gary Bains is a 2013 MPP candidate at SPPG. He also holds a BA in Political Science and Economics from McMaster University. His interests include cashews, and listening to people talk about cashews.

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