Institutional Corruption: Linking and Learning from Regulatory Capture

by Donald W. Light

This is the third is a set of blogs devoted to strengthening the concept and theory of institutional corruption (IC). A previous blog urged that IC would be greatly strengthened by drawing on moral philosophy to establish a normative, external foundation for both defining when IC is occurring and for developing legitimate reforms for institutional integrity.

A second blog pointed out that all IC occurs within a dynamic, historically changing field of countervailing powers (C-Ps) and therefore an adequate account of IC needs to include the identification of those C-Ps and how they are affecting IC. These usually include corruptors, the corrupted, and those affected in multiple ways.

Could IC also benefit from linking to regulatory capture, a much older and richer concept and body of work? And how could we show the relevance of IC to economists, political scientists, and policy-makers involved in capture thinking? This question is particularly relevant because The Tobin Project is actively trying to update and strengthen capture theory and research. What follows is a short, limited review and reflection that needs to be more extensive.

In his "“Short, Inglorious History"” of regulatory capture, Richard A. Posner defines it as the “"subversion"” of agencies by regulated firms, “"turning the agency into their vassal."” Posner maintains that capture differs from regulation intended by a legislative body to serve the private interests of firms, a distinction that I will argue would be dealt with more effectively if capture theory were to draw on IC theory, because ruling out legislative intent rules out the core contribution of Thompson and Lessig on ways in which industry captures or corrupts Congress and the legislative process. If capture theory confines itself to forms of subversion or control that occur only after a group of firms or an industry uses millions of dollars and hundreds of lobbyists to create an economy of influence that helps legislators to "“see"” things their way and set up regulations to enhance their wealth or power, then capture theory misses the main act of how a set of concentrated stakeholders frame regulation. Further, capture alone is value neutral —–““ it may be good or bad from a given stakeholder'’s point of view. Corruption clearly indicates that something worthy or good has become "“tainted"” or "“morally debased,"” to use words in the dictionary, or made to no longer function properly, as when a file is corrupted.

Further on, Posner writes about George Stigler and economists'’ view that regulation is something that an industry purchases. By "“purchases,"” they must mean through institutional practices that corrupt the democratic process, such as those described by Larry Lessig and by Mal Salter in his book on Enron. Once again, IC theory has a breadth and normative base that capture theory lacks, though this economic view implies that capture includes the legislative framework as well. IC theory also applies to many institutions that are not involved in regulation. For these reasons, IC theory is more comprehensive and inclusive than capture theory. If IC research and analysis were to include the historically dynamic account of countervailing powers, it would address Posner'’s complaints that capture theory is rather static in its outlook. Posner concludes glumly that “"the term ‘'regulatory capture'’ should be retired."” Here we have reasons for why it should be subsumed and revitalized, rather than retired.

Capture theory offers some insights for IC, and perhaps the central one comes from Mancur Olson, that public interest and passion for regulatory reform is diffuse and short-lived, and the resulting public benefits (like less pollution) are diffuse. But the effects on those regulated are concentrated, as are their efforts to alter or bend or corrupt the program (public housing) or regulatory institution (EPA) that is aimed at creating a public good. Olson'’s theory implies that capture is inevitable. Is Institutional Corruption inevitable too? One implication is that even were Congressional elections to be publicly funded, the concentrated interests of companies that pollute, or construction companies that build public housing, or drug companies that provide drugs, would still find plenty of ways to alter, bend, or corrupt democratic procedures and legislation to advance their interests. This implication of Olson and this school of thought warrant discussion.

Another set of interesting distinctions can be found in Daniel Carpenter’'s essay on Corrosive Capture. He defines regulatory capture as raising entry barriers, such as licensing. This excludes those who are not, or cannot be licensed. Changing FDA rules from allowing new drugs on the market unless the staff raised an objection before 1962, to requiring prior testing and approval, would be another example of raising entry barriers that privilege one set of products and producers over others. I would recommend calling this entry capture and save “"regulatory capture”" for a broader use.

"Corrosive capture" consists of actions that weaken regulatory oversight and independence once entry barriers have had their effects. In recent decades, we'’ve seen “"capture" evinced in the weak application (or non-application) of regulatory tools. Corrosive capture can also occur through “"boundary manipulation"” and the revolving door syndrome. Two other interesting forms are the federal pre-emption of state regulatory bodies or rules, and enabling companies to choose the regulatory setting they prefer through “"regulatory arbitrage."” This strategy is key to keeping the EMA (European Medicines Agency) weak, because companies can always choose any one of the European state regulatory bodies instead of the EMA, and if it approves their new drug, all other countries must accept that decision, even if the drug has few benefits and is very expensive. One can see here how corrosive and regulatory (or entry) capture blur together so that the distinction needs further discussion. But the idea of corrosive capture brings capture theory rather close to corruption theory and suggests a need for dialogue.

A third distinction made in the Tobin Project work is cultural capture that shapes the assumptions, terms, and accounts that all parties come to accept. As I pointed out in a general essay on strengthening IC theory, this kind of capture or corruption is the most powerful and least developed. For example, industry has succeeded, through story after story, in having most Congressmen and regulators believe that new drugs benefit patients so that the goal is to approve them as quickly as possible. Nevermind that 90 percent of new drug products are found to be little or no better than existing ones. Nor evidence from rigorous, quantitative studies at Harvard and Yale that faster reviews lead to significantly more products having serious side effects. Once the premise and account is taken for granted as accepted truth, facts to the contrary get ignored or discredited. Senator Sherrod Brown has called this “"cognitive capture”" —– capturing people’'s minds.

If Institutional Corruption is to gain wider use and recognition, it needs to be more embracing and inclusive. The Tobin Project is broad and includes work on preventing capture, similar to work at the Edmond J. Safra Lab  on preventing corruption or investigating exemplars of institutional integrity. Perhaps an invitational workshop at which IC and capture scholars explore shared interests would benefit both groups.