Regulatory capture happens when an agency created to police an industry ends up serving it. This level opens the hood. Capture is rarely a single betrayal. It grows from the way interests organize, the way regulators think, and the way agencies are designed.
A commission "of great use"
American railroads in the 1880s charged favored shippers less than everyone else, and farmers and small merchants demanded relief. In 1887 Congress created the Interstate Commerce Commission, the first major federal regulatory agency, to curb unfair and discriminatory railroad rates. A few years later a railroad president asked his lawyer, Richard Olney, whether the industry should push to abolish it. Olney, who became US Attorney General a few months later, advised against it in a letter of 1892: "The Commission, as its functions have now been limited by the courts, is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of railroads, at the same time that that supervision is almost entirely nominal." In other words, the commission could calm the public while its oversight stayed weak. He added that the older such a commission grew, the more it would take "the business and railroad view of things." Historians still argue over how far the ICC was captured during its long life, but the letter shows that some industry leaders saw the possibility from the start.
Concentrated benefits, diffuse costs
Why would an industry find a regulator easier to win over than the public? The economist Mancur Olson offered a general answer in The Logic of Collective Action (1965). Small groups with large stakes organize more easily than large groups with small stakes. A rule that adds a few dollars a year to every family's grocery bill may be worth hundreds of millions to a handful of producers. The producers can afford lobbyists, lawyers and constant attention to the agency; no family will spend its weekends studying an import quota. Each consumer reasonably decides that fighting the rule is not worth the effort, and the few who gain win by default. Nobody has to be bribed for this to happen.
Capture of the mind
Olney's prediction that an aging commission would adopt the business view points to a quieter mechanism. The economist James Kwak calls it cultural capture: regulators come to share the industry's worldview through common schooling, social ties and status. When the people being regulated are admired, well paid and educated at the same universities as their regulators, their arguments simply sound more reasonable. Before the 2008 financial crisis, many supervisors accepted bankers' claims that sophisticated risk models made large banks safer. Few were paid to believe it. They believed it because the smartest people they knew did.
One agency, two masters
Agency design can build capture in. The US Minerals Management Service both collected royalties from offshore oil and gas, one of the federal government's largest sources of non-tax revenue, and enforced drilling safety. Critics saw an agency that both raised oil revenue and policed drilling safety, so a safety order that slowed production also cut the money it was charged with bringing in. In 2008, reports by the Interior Department's Inspector General found staff in its royalty program accepting gifts from energy companies and, in some cases, partying with industry employees and having sexual relationships with them. On 20 April 2010 the Deepwater Horizon rig exploded in the Gulf of Mexico, killing 11 workers and causing the largest marine oil spill in US history. Within months the government split the agency so that leasing, safety enforcement and revenue collection sat in separate bodies.
Letting the regulated do the checking
Regulators with limited budgets often delegate. For decades the US Federal Aviation Administration has relied on a manufacturer's own employees doing certification work on the regulator's behalf, a system formalized in 2005. Defenders note that no agency could hire enough engineers to examine every part of a modern airliner, and that delegation has a long safety record. After two Boeing 737 MAX crashes, in Indonesia in October 2018 and Ethiopia in March 2019, killed 346 people, investigators found that a flight control system linked to both crashes had been poorly explained to regulators and pilots. A 2020 congressional report faulted both Boeing's concealment and the FAA's oversight.
Is capture everywhere?
Capture is easy to allege. In a 2014 book, Daniel Carpenter and David Moss argued that the charge is often made without proof, and proposed a stricter test: evidence that policy moved away from the public interest and that the industry worked to move it. They also stressed that capture comes in degrees and can be prevented, so finding some industry influence does not mean an agency is worthless or should be abolished.
Worked example
A state utility commission approves a large rate increase requested by the regional power company. Critics cry capture. Using Carpenter and Moss's test, an analyst asks first whether the decision departed from the public interest: were the company's cost claims checked by independent engineers, or accepted as filed? Then the analyst asks whether the company drove the result: did it supply the only data, and did two commissioners come from its management? Olson's logic explains the hearing room, where the company sent twelve lawyers and consumers were represented by one underfunded state advocate. The answer may still be that the increase was justified. The test turns an accusation into questions that evidence can settle.