Regulatory Capture: Definition & Theory

Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson, you will learn the definition of regulatory capture and some of the reasons why it happens. You will also learn about regulator shopping and cultural capture.

Common Events

Have you ever filed a complaint with a government agency charged with protecting consumer interests only to find they seem more interested in protecting the industry they serve? Do you see regulators come from the industry they are supposed to watch and then return to that industry after their term is up? Do financial regulators seem to think like bankers? These are common examples of regulatory capture.

Regulator Capture

Regulatory agencies are created to protect consumers but evidence suggests all regulatory bodies fall prey to regulatory capture. Regulatory capture occurs when regulatory bodies protect and advance the agenda of the industry it was formed to regulate. These regulatory bodies become known as captured agencies.

Examples

There are many examples of captured agencies in American and international history. Among the many famous examples of regulatory capture in the last few decades are:

  • The Security and Exchange Commission (SEC) refused to investigate Bernie Madoff for ten years even though it had been repeatedly warned Madoff's financial statements did not make sense. This inaction led to the loss of billions of dollars for his investors. Madoff was an influential member of the investment community and was never satisfactorily supervised or audited by the SEC.

Bernie Madoff, an infamous example of regulatory capture.

  • The financial regulators who allowed the savings and loan industry to expand and then fail in massive numbers in the 1980s. This resulted in a new regulatory organization for the savings and loan industry and a massive government bailout.
  • The Federal Aviation Administration allowing airplanes from a major airline to fly even though safety inspections suggested they should not.

Why Does It Happen?

Nobel Prize winning economist George Stigler suggests capture will become the norm for any regulatory agency. Here are a few reasons why it happens:

1. Regulatory body members usually come from the industry itself. For example, a state board of accountancy is largely composed of certified public accountants, but to avoid regulatory capture, they are using public members as part of the commission. The New Jersey State Board of Accountancy contains both public members and a representative from the State government.

2. The regulatory body hears from the industry far more than it hears from the public. The members of the industry have a vested interest and are more concerned about the regulation of the industry than the public. Consumers may only have occasional interest in that industry. Frequently, the public's only contact with a regulatory body is when a problem occurs. There have been many examples of regulatory bodies acting to shield the industry from consumer complaints.

3. The American system of federalism will often divide jurisdiction over a problem between state and federal regulators. This system presents ample 'targets of opportunity' for regulatory capture. The banking industry is one example. Additionally, some industries such as the insurance industry are regulated primarily by the states. It is much easier for larger special interest groups such as corporations to capture a smaller and less well funded state regulatory body than a national one.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support