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A Dynamic Theory of Regulatory Capture

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  • Alessandro De Chiara
  • Marco A. Schwarz

Abstract

Firms have incentives to influence regulators' decisions. In a dynamic 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 reward friendly regulators, which facilitates collusive equilibria. Moreover, the revolving-door channel need not require an explicit agreement between the firm and the regulator, but may work implicitly giving rise to an industry norm. This renders ineffective standard anti-corruption practices, such as whistle-blowing protection policies. We highlight that closing the revolving door may give rise to other inefficiencies. Moreover, we show that cooling-off periods may make all players worse off if timed wrongly. Opening the revolving door conditional on the regulator's report may increase social welfare.

Suggested Citation

  • 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.
  • Handle: RePEc:inn:wpaper:2020-12
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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; corruption; dynamic games; experts; regulation; regulatory capture; revolving door;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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