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A Theory of Soft Capture

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  • Axel Gautier
  • Per J. Agrell

Abstract

Capture of regulatory agencies by firms or other stakeholders has given rise to a rich literature, much of which is dominated by models in which the motivation for the welfare-reducing behavior is found in side-contracting (bribes, corruption), threats (blackmail, political support) or corresponding mechanisms for repeated games (reputation, career concerns, signaling for promotion). Notwithstanding, the empirical support for monetary corruption and 'revolving doors' is scarce and inconclusive. We propose an alternative and more intuitive model for regulatory capture that is based on information transmission and asymmetric information. In a three-tier model, a regulator is charged by a political principal to provide a signal for the type of a regulated firm. Only the firm can observe his type and the production of a correlated signal with a given accuracy is costly for the regulator. The firm can costlessly provide an alternative signal of lower accuracy that is presented to the regulator. In a self-enforcing equilibrium, the regulator transmits the firm-produced signal, internalizes its own savings in information cost and the firm enjoys higher information rents. The main feature of soft capture is that it is not based on a reciprocity of favors but on a congruence of interests between the firm and the regulator.

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Paper provided by Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège in its series CREPP Working Papers with number 1107.

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Date of creation: 2011
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Handle: RePEc:rpp:wpaper:1107

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  1. Peltzman, Sam, 1976. "Toward a More General Theory of Regulation," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 19(2), pages 211-40, August.
  2. Belleflamme,Paul & Peitz,Martin, 2010. "Industrial Organization," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521681599.
  3. Winfried Pohlmeier & Luc Bauwens & David Veredas, 2007. "High frequency financial econometrics. Recent developments," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/136223, ULB -- Universite Libre de Bruxelles.
  4. Martimort, David, 1999. "The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(4), pages 929-47, October.
  5. Yolande Hiriart & David Martimort, 2012. "How much discretion for risk regulators?," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 43(2), pages 283-314, 06.
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