Regulatory capture

The basic idea

The economist George Stigler proposed in 1971 a counter-intuitive theory: the regulation of an industry is often demanded and shaped by the regulated industry itself, to its own advantage, rather than imposed on it by a state protecting consumers. The reason is simple: the industry has a concentrated interest and large resources to influence the rules, whereas consumers, although far more numerous, each have a small individual interest and rarely organise effectively to counter this influence^[1].

Stigler showed that in many historical cases regulation in fact served to limit competition (barriers to entry for new firms, guaranteed minimum prices) rather than to protect consumers from market abuses, exactly the opposite of the official reason regulation was created^[1].

Why it matters for independent authorities

The theory is directly relevant to independent regulatory authorities (energy, communications, financial services): being funded from fees paid by the very industry they regulate, and having a continuous, long-term relationship with a small number of large companies in the sector, these authorities are structurally exposed to the risk Stigler describes, whatever the personal intentions of those who run them.