Why do most of us feel like economic regulation does not promote the public interest, but rather serves the regulated entities and other special interest groups?
Contrary to popular wisdom, the problem does not lie with corrupt regulators.
Even a well-meaning regulator may find himself captured, because of the system he operates in. The problem is not with personell, but rather with incentives that create “regulatory capture”.
A study by Guy Rolnik and Roy Shapira from Harvard fleshes out how the capture system works.
For one, capture stems from asymetric information. Regulating complex markets requires access to information and expertise.
Special interest groups employ an army of lobbysts and marshal data-backed expert opinions, convincing the regulator that promoting a certain policy is in the best interest of the public.
Even when it is not…
Another driver of regulatory capture is asymetric monitoring. When trying to regulate under uncertainty, mistakes are inevitable. Regulators thus face a choice – on what side to err.
When the regulator errs in favor of the regulated industry his mistake may not be revealed, as the costs are born by the disperse unorganized public.
But when the regulator errs against the industry, any mistake will be spotlighted and damage his reputation.
Finally, the regulator gradually identifies with the indsutry worldviews. He sees himself as part of thier social group – a cultural capture.
This is how the system works.
But under certain conditions the capture can be unlocked.
It requires increased awareness among the general public; an active investigative media that represents the dispersed public; and civic society organizations with independent sources of information and expertise. When the regulator starts taking into account the general public, things can and do change.