Regulatory Capture by Sophistication
One explanation for the poor performance of regulation in the recent financial crisis is that regulators had been captured by the financial sector. We present a micro-founded model with rational agents in which banks may capture regulators due to their high degree of sophistication. Banks can search for arguments of differing complexity against regulation. Finding such arguments is more difficult for a bad bank, which the regulator wants to regulate more strictly. However, the more sophisticated a bank is, the more easily it can produce an argument that a regulator may not understand. Career concerns prevent the regulator from admitting this, hence he rubber-stamps even bad banks, which leads to inefficiently low levels of regulation. Bank sophistication leads to capture, and thus to worse regulatory decisions.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.socialpolitik.org/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bennedsen, Morten & Feldmann, Sven E., 2006.
"Informational lobbying and political contributions,"
Journal of Public Economics,
Elsevier, vol. 90(4-5), pages 631-656, May.
- Bennedsen, Morten & Feldmann, Sven E., 2000. "Informational Lobbying And Political Contributions," Working Papers 08-2000, Copenhagen Business School, Department of Economics.
- Morten Bennedsen & Sven E. Feldmann, 2000. "Informational Lobbying and Political Contributions," CIE Discussion Papers 2000-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- Martin Hellwig, 2010.
"Capital Regulation after the Crisis: Business as Usual?,"
Working Paper Series of the Max Planck Institute for Research on Collective Goods
2010_31, Max Planck Institute for Research on Collective Goods.
- Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 8(2), pages 40-46, 07.
- Friedrich Heinemann & Martin Schüler, 2004. "A Stiglerian View on Banking Supervision," Public Choice, Springer, vol. 121(1), pages 99-130, October.
- Jean-Jacques Laffont & Jean Tirole, 1988.
"The Politics of Government Decision-Making: A Theory of Regulatory Capture,"
506, Massachusetts Institute of Technology (MIT), Department of Economics.
- Laffont, Jean-Jacques & Tirole, Jean, 1991. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1089-127, November.
- Jean-Jacques LAFFONT & Jean TIROLE, 1990. "The Politics of Government Decision-Making : a Theory of Regulatory Capture," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9004, Université de Lausanne, Faculté des HEC, DEEP.
- Oliver Board & Andreas Blume, 2008.
365, University of Pittsburgh, Department of Economics, revised Aug 2008.
- Paul R. Milgrom & John Roberts, 1985.
"Relying on the Information of Interested Parties,"
Cowles Foundation Discussion Papers
749, Cowles Foundation for Research in Economics, Yale University.
- Giammarino, R.M. & Sappington, D.E.M., 1990.
"An Incentive Approach to Banking Regulation,"
367, California Davis - Institute of Governmental Affairs.
- George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
- Turkay, Evsen, 2011. "Evidence disclosure and severity of punishments," MPRA Paper 31504, University Library of Munich, Germany.
- Boyer, Pierre C. & Ponce, Jorge, 2012. "Regulatory capture and banking supervision reform," Journal of Financial Stability, Elsevier, vol. 8(3), pages 206-217.
- Levine, Michael E & Forrence, Jennifer L, 1990. "Regulatory Capture, Public Interest, and the Public Agenda: Toward a Synthesis," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(0), pages 167-98.
- Sher, Itai, 2011. "Credibility and determinism in a game of persuasion," Games and Economic Behavior, Elsevier, vol. 71(2), pages 409-419, March.
When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc13:79991. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.