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A Dynamic Theory of Regulatory Capture

Alessandro De Chiara and Marco Schwarz

Working Papers from Faculty of Economics and Statistics, University of Innsbruck

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.

Keywords: collusion; corruption; dynamic games; experts; regulation; regulatory capture; revolving door (search for similar items in EconPapers)
JEL-codes: D82 J45 K23 L14 L51 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2020-12
New Economics Papers: this item is included in nep-com, nep-gth, nep-law, nep-lma, nep-mic and nep-reg
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