Edited by Joseph E. Harrington Jr and Yannis Katsoulacos
14. Rethinking regulatory capture Per J. Agrell and Axel Gautier 14.1 INTRODUCTION The design of a regulatory process is a challenging task as it involves complex information processing and the participation of many actors: politicians, executives, legislature, supervisors, auditors, regulated firms or industries, customers, taxpayers, trade unions. These stakeholders can be categorized into three groups: (political) decision makers, supervisors, and interest groups. With this distinction in mind, the regulatory process can be represented as a three-layer hierarchy with, on the top, the decision maker (the political principal), in the middle the supervisor (the regulatory agency), and on the bottom the regulated firm (Figure 14.1(a)). In such a hierarchical organization, the bottom layer has privileged access to key information relevant for decision making. Regulated firms, for instance, have private information on firm and industry costs, demand characteristics, and available technologies. This asymmetry of information reduces the effectiveness of the regulatory process. To fill in the information gap, Political Principal Regulatory contract Information reporting Political Principal Regulatory contract No/Biased reporting Political Principal Regulatory contract Report biased information Regulator Information collection Regulator Information collection Regulator Biased information Bribe $$$ Firm (a) Firm (b) Firm (c) Figure 14.1 (a)The three-layer hierarchy; (b) Traditional capture; (c) Soft capture 286 HARRINGTON PAGINATION (M2913).indd 286 29/05/2012 16:06 Rethinking regulatory capture 287 the political principal appoints a supervisor. The regulatory agency is thus an information gathering intermediate for the political principal who remains in charge of the main regulatory tasks.1 Performing in this task, the...
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