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Regulatory capture and quality

Abstract Drawing on accounts of regulatory capture in which an industry’s influence activities pull regulation in its direction, apart from incentives or information, this article develops a formal model of capture as a shift in a policy-making agent’s preferences, due to costly actions by the industry. One type of action is rentseeking that produces only capture, whereas the other type also improves regulatory quality by producing information that reduces policy uncertainty. The model shows how the ability to capture the agent can incentivise the interest group to produce more information. Thus, aligning an agent’s preferences with a political principal’s and immunising him from capture is not generally optimal; instead, the principal prefers an agent who is susceptible to capture associated with quality improvements but also initially more opposed to the group than the principal. A comparison of two Securities and Exchange Commission rulemakings illustrates the logic of the model.