Regulatory failure (5): A private interest perspective

The previous blog posts in this series have reflected on regulatory failure from a public interest perspective, a public choice perspective, and institutional perspectives on regulation. This post will look at regulatory failure from a private interest perspective on regulation. That concludes the four major perspectives on regulation and what they can teach us about regulation.

A very brief summary of private interest theory of regulation

Private interest perspectives on regulation hold that regulation is not always (or not only) developed and implemented to pursue goals that serve and protect the public at large, but sometimes also to serve the private interests of some individuals and groups. The assumption underpinning the private interest theory of regulation is that these individuals and groups seek to influence regulators to introduce regulation that serves their interests but not necessarily those of society.

Calls to restrict new businesses’ market access in existing markets by established businesses in those markets are a good illustration. Local businesses, for example, may argue that it is not safe to allow international businesses to operate in the domestic market because they have no understanding of or appreciation for local issues such as biosecurity, culture, and so on.

The private interest theory of regulation boils down to the idea that regulators are continuously influenced by their targets, beneficiaries, and political principals and often favour their private interests, sometimes at the expense of the public interest.[1]

Regulatory failure from this point of view

For those who look at regulation from a private interest point of view, regulatory failure means those situations where regulators have been influenced (‘captured’) by their targets, beneficiaries, and political principals to such an extent that they systematically ignore the public interest.[2]

Kinds of failure and their causes from this point of view

The literature that engages with regulatory failure from a private interest perspective overlaps somewhat with the literature that does so from a public choice perspective. It is difficult to delineate where one perspective ends, and the other begins. Still, two kinds of regulatory failure are distinctly ‘private interest’: capture and the life-cycle theory of regulation

Capture

Typically, regulatory capture is seen as situations in which individuals and collectives have been successful in influencing regulators (including individuals working at regulatory agencies)[3] and shape regulatory systems to serve their own (private) interests.[4] For example, regulatory capture is possible because it is relatively easy for a small number of firms targeted by regulation to coordinate attempts to influence regulators. However, this is difficult for the vast number of dispersed beneficiaries of that regulation.[5] Particularly the anti-regulation rhetoric that emerged in the USA and the UK in the 1970s and 1980s argued that regulators had been captured by the very industries it sought to regulate. Therefore, their attempts to regulate these industries well were seen to have failed.[6]

There will likely be some truth in this ‘evil genius’ explanation of capture (i.e., vested interests that actively, purposefully, and successfully lobby regulators), but more seems at stake. Often regulators cannot entirely shield themselves from being influenced by the individuals and organisations they target. For example, regulators are often highly dependent on the industry they regulate for compliance information or the development of future regulation. As a result, the industry will always have an information advantage over the regulator. Some form of collaboration and partnership building with the industry is required if the regulator wants to access this information.[7] In such situations, the challenge for regulators will be to find a balance between being informed and being influenced.[8]

It is also relevant to stress that not all forms of regulatory capture will result in (blatant) regulatory failures, as some parts of the literature suggest. For example, in a situation of weak capture, the public at large might, at least sometimes, still be better off with regulation that is modestly influenced by vested interests than with a situation of no regulation at all.[9]

Life-cycle theory of regulation

Within the private interest perspective, sometimes regulatory failure is explained with the ‘life-cycle theory of regulation’.[10] It holds that when newly established, regulatory agencies attract enthusiast staff and have full political backing. It can then regulate its targets vigorously. However, over time, the targets learn to roll with the punches of the agency, they become more cooperative towards the agency, and the agency slowly loses its enthusiast staff and political backing. As a result, the regulator must rely more and more on cooperation with its targets. Later, the regulator adopts the values, opinions, and interests of the targets it regulates because of the ever-stronger relationship. While the theory has been challenged as unrealistically predictive,[11] its inherent notion of creeping capture aligns well with the causes of regulatory failure discussed in institutional perspectives on regulation.

To conclude

In its darkest form, the private interest perspective on regulation holds that regulators are captured by their (malicious) targets and introduce regulation that harms the public interest to serve the interest of these targets. In a lighter form, it holds that regulators inevitably must cooperate with their targets to develop suitable regulation, obtain compliance information, and so on. In this cooperation process, regulators run the risk of being captured, particularly because it is relatively easier for targets to organise than for beneficiaries of regulation.

Obviously, regulatory failure resulting from regulatory capture is the main insight added by this perspective. Yet, perhaps the more nuance insight it provides is more relevant. It asks regulators to think carefully about where in the often-necessary process of collaboration being informed by its targets becomes being influenced by them, and what strategies should be in place to prevent the latter from happening.


[1] Mitnick, B. (2011). Capturing capture: Definition and mechanisms. In D. Levi-Faur (Ed.), Handbook on the politics of regulation (pp. 34-49). Northampton: Edward Elgar.

[2] Horwitz, R. (1989). The irony of regulatory reform: The deregulation of American telecommunications. Oxford: Oxford University Press.

[3] Sheikh, K., Saligram, P., & Hort, K. (2015). What explains regulatory failure? Analysing the architecture of health care regulation in two Indian states. Health Policy and Planning, 30(1), 39-55.

[4] Baldwin, R., Cave, M., & Lodge, M. (2012). Understanding regulation: Theory, strategy and practice – second edition. Oxford: Oxford University Press.

[5] Horwitz, R. (1989). The irony of regulatory reform: The deregulation of American telecommunications. Oxford: Oxford University Press.

[6] Stigler, G. J. (1971). The theory of economic regulation. Bell Journal of Economics and Management Science, 2(Spring), 3-21.

[7] King, D., & Hayes, J. (2018). The effects of power relationships: Knowledge, practice and a new form of regulatory capture. Journal of Risk Research, 21(9), 1104-1116.

[8] van Schouwen, J. (2018). What makes a dangerous goods disaster? The regulatory perspective. Revue Générale de Droit, 48(1), 177-226.

[9] Carpenter, D., & Moss, D. (2013). Preventing regulatory capture. Cambridge: Cambridge University Press.

[10] Bernstein, M. (1955). Regulating business by independent commission. Princeton: Princeton University Press.

[11] Wilson, G. (1984). Social regulation and explanations of regulatory failure. Policy Studies, 32(2), 203-225.

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