Interest Groups and Regulatory Capture

Economic orthodoxy before 1971 suggested that regulatory intervention could improve on market outcomes in cases of market power, negative spillover effects, or asymmetric information. That orthodoxy was overturned in 1971 with the publication of George Stigler’s “Theory of Economic Regulation,” which concludes that regulatory agencies are vulnerable to capture by special interest groups who shape regulatory outcomes in ways that benefit the regulated industry itself at consumers’ expense. Many empirical studies have since then confirmed Stigler’s theoretical insights. This chapter summarizes the major theoretical and empirical contributions to the literature on economic regulation, provides an overview of the various groups that can capture the regulatory process, and summarizes more recent contributions highlighting regulation’s regressive effects and the “revolving door” between regulatory agencies and regulated firms.