Regulatory Capture through Manipulation of Voter Preference

• In Event: Formal Models of Bureaucratic and Judicial Politics

Abstract

Are lobbying and campaign contributions the only regulatory capture mechanisms? I study an indirect channel of regulatory capture that complements or even substitutes the traditional mechanisms. I show that firms can affect regulatory politics through voters by strategically providing them with economic incentives (e.g., jobs). The firm wants a particular level of regulation to, for example, minimize compliance cost or force out competitors. The voter prefers more economic transfers from the firm and has her own ideal level of regulation, allowing the firm to strategically deliver benefits to manipulate the voter’s inference about the incumbent. Because the firm’s business activities influence the voter’s political preference, they affect the election outcome and distort the incumbent’s regulating. The incumbent has an incentive to set regulation as close to the voter’s ideal level as feasible to improve her re-election prospects. The firm’s business activities distort the incumbent’s baseline electoral incentive because reducing economic benefits (e.g., layoffs) or providing them (e.g., building a new factory) to the voter affects her belief about the incumbent. The firm hurts the voter’s pocketbook if the incumbent’s regulatory preference is sufficiently close to its own and delivers benefits if the incumbent is sufficiently extremist. The incumbent’s choice of mandate always benefits the firm in equilibrium, usually at the cost of voter welfare. However, the voter is better off with the firm’s presence if the incumbent’s regulatory preference is sufficiently more extremist than the voter and firm’s; the firm’s strategic action moderates the incumbent’s regulating and economically benefit the voter. The seemingly pure economic activities of firms have political consequences and influence regulatory politics indirectly through voters.

Author

• Joohyun Shon, New York University