Regulatory Capture Theory

 Capture theory was introduced by George Strigler

(1971)
 American economist whose incisive and unorthodox
studies of marketplace behavior and the effects of
government regulation won him the 1982 Nobel Prize
for Economics.
Regulatory Capture Theory

 It is the process by which regulatory agencies eventually come to

be dominated by the very industries they were charged with
regulating.
 Regulatory capture happens when a regulatory agency, formed to
act in the public's interest, eventually acts in ways that benefit the
industry it is supposed to be regulating, rather than the public.
 Public interest agencies that come to be controlled by the industry
they were charged with regulating are known as captured
agencies.
 Regulatory capture is an example of gamekeeper turns poacher; in
other words, the interests the agency set out to protect are ignored
in favor of the regulated industry's interests.
Structure of theory

 The regulatory capture theory was build based on following

assumptions:

1. The regulator agency, regulated party and customers are all

greedy and seeking to maximize their own interest.
2. All interest related party have a rational expectation for another
party.
3. It might take a long period of time and huge effort for industries
(regulated party) capture the regulator. To get though this theory
the impact of cost of capture to efficiency should be ignored.
Why Does it happen?

 Nobel Prize winning economist George Stigler suggests capture will

become the norm for any regulatory agency. Here are a few
reasons why it happens:
 Regulatory body members usually come from the industry itself. For
example, a state board of accountancy is largely composed of
certified public accountants, but to avoid regulatory capture, they
are using public members as part of the commission. The New Jersey
State Board of Accountancy contains both public members and a
representative from the State government.
Criticisms of capture theory

 According to Posner (1974) this theory has some weakness in its

theoretical foundation. There are questions cannot be answered.

 Though the theory describes that the deal between regulatory agency
and the regulated party affect regulatory process, it does not suggest
what process the regulated party did to capture the regulator
 The theory did not explain why customers cannot capture the
regulatory agency to protect their interest. Now that the regulated
party have the ability to capture the regulator, why don't they prevent
the creation of regulatory agency in the first place?
Regulatory Capture
Theory
 Australia's ASRB. A Case Study of
Political Activity and Regulatory
‘Capture’

Government
Reason: Community

Accounting Standard Review Board

Low Level of Compliance Accounting Rules

 Regulatory Capture in the
Globalization of Accounting
Australian Equivalents
Standards to International
FROM TO
Financial Reporting
Change Accounting Standard
Standards
(A-IFRS)
Reason: Developed
by
Swings in political and regulatory influences on
initiatives to reform accounting-standard-
setting environments, policies, and processes.