Mar

8

A good article on regulatory capture is here.  

Carder Dimitroff writes: 

Some observations.

First, regulatory capture is frequently discovered at the state level. State regulators may have built-in conflict of interests that can benefit the regulated. In some cases, state regulators approved questionable investments that appear to harm constituents.

Second, regulatory capture is not a digital issue. It's an analog that is represented by degrees of capture that change over time.

With regard to the second observation, consider fee-for-service agencies such as the Federal Aviation Administration (FAA), the Food and Drug Administration (FDA), the Nuclear Regulatory Commission (NRC) and others. Today, many might say these agencies appear to be free from capture. In fact, they are captured at a macro level. Without customers to pay regulatory fees, their agencies will shrink or they may go out of business. As such, regulatory decisions are often framed in terms of what "the industry" will tolerate.

Keep in mind that "the industry" represents a portfolio of regulated interests. Industry and regulators may allow a few of the regulated may experience difficult regulatory interactions as long as the overall portfolio is unharmed. This is why we see industry associations carefully take on regulators. This is also why we also see revolving doors between regulators and associations.

The art of regulating requires an understanding of timing, incrementalism and return on investment. Regulators can increase regulation incrementally and over time as long as the industry can tolerate (or profit) from changes. In some cases, courts step in and force regulators to speed up the process (Mass v. EPA - https://en.wikipedia.org/wiki/Massachusetts_v._Environmental_Protection_Agency).

A fascinating scenario is when industry interacts with two or more regulators at the same time. In the Mass v. EPA case where the US Supreme Court required EPA to act, industry went to state regulators and asked for rate increases.

Guess who won in that deal? The regulated and the regulators!


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