A Theory of Soft Capture

AuthorPer J. Agrell,Axel Gautier
Published date01 July 2017
Date01 July 2017
DOIhttp://doi.org/10.1111/sjoe.12171
Scand. J. of Economics 119(3), 571–596, 2017
DOI: 10.1111/sjoe.12171
A Theory of Soft Capture
Per J. A gr el l
Catholic University of Louvain, B-1348 Louvain-la-Neuve, Belgium
per.agrell@uclouvain.be
Axel Gautier
University of Li`
ege, B-4000 Li`
ege, Belgium
agautier@ulg.ac.be
Abstract
In this paper, we propose an alternative model for capture that is based not on reciprocity
but on congruence of interests between the firm and the regulator. A regulator is charged by
a political principal to provide an imperfect signal for the type of a regulated firm. Only the
firm can observe its type, and the production of a signal is costly. The firm can provide a
costless alternative signal of lower accuracy to the regulator. In a self-enforcing equilibrium,
the regulator transmits the firm-produced signal and saves information-gathering costs, and
the firm enjoys higher information rents.
Keywords: Information; regulatory capture
JEL classification:D72; L51
I. Introduction
Regulatory capture is an area that has attracted considerable attention from
both academia and practitioners in legal and organizational contexts. Gener-
ally, the notion that an agency, which monitors a sector in order to prevent
abuse of market power or to ensure non-discriminatory service provision,
is unduly influenced by the very firms that it is set to supervise is per se
a justified motivation to scrutinize regulatory design.
Capture is often analyzed using a three-layer hierarchy composed of a
political principal (government), a regulatory agency, and an industry or a
firm. Regulatory capture is then a side agreement between the regulator
and the firm to act against the interests of the political principal.1When the
We wish to thank J. Calzada, E. Cantillon, J.-J. Ganuza, S. Gilpatrick, C. Guerriero, J.
Jacqmin, P. M. Picard, I. Peere, W. Sand-Zantman, X. Wauthy, and two referees for their
useful comments and suggestions. Financial support from the Fonds de la Recherche Scien-
tifique (FNRS) is gratefully acknowledged.
1In the general setting, capture can be induced not only by the regulated firm, but also by
clients, staff, or other stakeholders who have interests in rent extraction (see Peltzman, 1976;
Becker, 1983).
CThe editors of The Scandinavian Journal of Economics 2015.
572 A theory of soft capture
regulatory environment is designed under asymmetric information, capture
originates in the combination of regulatory discretion and information rents
left to the firm (Tirole, 1986; Laffont and Tirole, 1993, Chapter 11).
In most capture models, the firm influences the regulatory behavior by
a mechanism based on threats2(damaged reputation) or rewards (bribes,
revolving doors); see Dal B´
o (2006) for a survey. Capture here is based
on an exchange of favors between the regulator and the regulated firm.
The regulator leaves extra rents to the firm, for instance by not disclosing
valuable information or by lenient enforcement of regulations. In return,
the firm or the industry offers a bribe3or the possibility of post-regulatory
employment in a regulated firm (revolving doors). Taking the possibility
of capture into account, the government optimally limits the regulatory
discretion (Hiriart and Martimort, 2012) and/or decentralizes its objective
to the regulator, who is then accountable for the regulatory outcome.
According to this classical view, we should observe either capture of
regulators by special interest groups or a regulatory design that prevents
capture.
Empirical support for monetary corruption is scarce and mostly incon-
clusive, possibly because of the lack of data and imperfect proxies. Contri-
butions such as those of Dal B´
o and Rossi (2007), Kenny (2009), Estache
et al. (2009), and Berg et al. (2012) all show coincidences between various
indicators of regulatory dysfunction and the prevalence of corruption in
certain countries (often developing countries), but the link of causality to
regulatory bribery has not been established. Alternative hypotheses, such as
corruption that affects other stages of the production or the administration,
could yield similar outcomes without primarily relying on the regulator.
Anecdotal evidence in Europe and the US does not suggest that bribery
of regulators is a widespread practice or that it would increase with the
number of regulatory authorities.
The “revolving door” hypothesis also has a disputed empirical support
(Eckert, 1981; Freitag, 1983; Cohen, 1986; Makkai and Braithwaite, 1992)4
but mechanisms do exist to limit the porosity between firms and regulators
2The model of Dal B´
o and Di Tella (2003) is one of very few models that include the threat
of punishment (violence, harassment, or slander) to capture the regulator.
3Estache and Wren-Lewis (2011) address open corruption problems associated with sector
regulation in developing countries (e.g., the payment of maritime liner registration fees in
cash in Liberia). Although such open money transfers tend to be rare in the Western world,
firms might organize side payments more discreetly. Regulated firms can, for example,
provide contracts for services to firms associated with the civil servant (regulator) or with
members of their family, provide valuable private information on traded assets or foreseen
business projects, real estate or other (costly) indirect transfers.
4Although more lenient applications of regulatory monitoring and empathy towards regulated
entities are prevalent among low- and medium-level staff members of regulatory authorities,
only a small fraction of these staff members seek or obtain employment in the regulated
CThe editors of The Scandinavian Journal of Economics 2015.

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