A Regulator's Career Option: Revolving Doors, Regulatory Signals, and Firm Tail Risk

This paper develops a revolving-door model in which a regulator designs policy signals that affect a regulated firm's capital structure while holding an implicit career option to leave public service for the regulated firm or its advisers. The model has three linked mechanisms. First, regulatory signals alter the firm's pricing, leverage, and risk choices by changing the tradeoff between consumer surplus and firm profit. Second, because the regulator's outside payoff is convex in regulated-firm value, the career option rises with firm value, leverage, and signal-induced volatility. Third, when signal-induced volatility raises the option vega of firm equity, the same mechanism can increase tail risk and reduce distance to default. A proof-of-concept calibration illustrates leverage-vega warning regions and shows how a regulator-induced signal can move a firm from a go-leverage region into an early-warning or crash-risk region. The calibration includes maturity comparisons, sensitivity grids over compensation convexity and initial leverage, a bank-like parameter anchor, stochastic signal simulations, and a stopping-horizon diagnostic. Evidence from federal payroll data on post-employment restrictions supports the career-option primitive by showing that limits on revolving-door opportunities affect post-agency pay. The exercises also organize historical regulatory failures: Lehman Brothers as a regulatory-vacuum case, Silicon Valley Bank as a distorted-signal and weak-supervision case, and Signature Bank as a converted-signal case involving post-public-service incentives, lighter oversight, rapid growth, uninsured-deposit exposure, and tail risk. The model does not predict collapse dates; it identifies conditions under which regulatory forbearance, weak debt penalties, and career-option incentives can delay oversight until firms cross a leverage-vega warning threshold.