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A Dynamic Theory of Regulatory Capture

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  • Alessandro De Chiara
  • Marco Alexander Schwarz

Abstract

Firms often try to influence individuals that, like regulators, are tasked with advising or deciding on behalf of a third party. In a dynamic regulatory setting, we show that a firm may prefer to capture regulators through the promise of a lucrative future job opportunity (i.e., the revolving-door channel) than through a hidden payment (i.e., a bribe). This is because the revolving door publicly signals the firm’s eagerness and commitment to rewarding lenient regulators, which facilitates collusive equilibria. We find that opening the revolving door conditional on the regulator’s report is usually more efficient than a blanket ban on post-agency employment and may increase social welfare. This insight extends to a variety of applications and can also be used to determine the optimal length of cooling-off periods.

Suggested Citation

  • Alessandro De Chiara & Marco Alexander Schwarz, 2021. "A Dynamic Theory of Regulatory Capture," CESifo Working Paper Series 8968, CESifo.
  • Handle: RePEc:ces:ceswps:_8968
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    1. Alessandro De Chiara & Marco A. Schwarz, 2020. "A Dynamic Theory of Regulatory Capture," Working Papers 2020-12, Faculty of Economics and Statistics, University of Innsbruck.

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    More about this item

    Keywords

    collusion; cooling-off periods; corruption; dynamic games; experts; regulation; regulatory capture; revolving door;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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