The politics of government decision-making : a theory of regulatory capture.

Summary "We develop an agency-theoretic approach to interest-group politics. We study the potential identification of a regulatory agency with the interests of a regulated firm and of non-inudustry groups. We how that : (1) The organizational response groups have in regulation. (2) The threat of producer protection leads to powered incentive schemes for the regulated firm. (3) Consumer politics may induce uniform pricing by a multi-product firm. (4) The power of interest groups is not determined by a supply-and-demand theory, in which regulation is captured by the interest group with the highest willingness to pay. First, the regulatory inefficiencies associated with the pressures of several interest group does not depend only on its willingness to pay, i.e., on the combination of its stake in regulatory decision and of its cost of organizing and of influencing government, but also on the kind of influence it wants to exert. The group has more power when its interest lies in inefficient rather that efficient regulation, where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the external monitor (Congress).".