Preventing capture of Economists from special interests…

A brilliant paper from Prof. Luigi Zingales of  U Chicago..

He says we often worry abut regulatory capture…

When economists talk about regulatory capture, they do not imply that regulators are corrupt or lack integrity. In fact, if regulatory capture was just due to illegal behavior, it would be easier to fight. Regulatory capture is so pervasive precisely because it is driven by standard economic incentives, which push even the most well-intentioned regulators to cater to the interest of the regulated. These incentives are built in their positions. Regulators depend upon the regulated for much of the information they need to do their job properly. This dependency creates a need to cater to the information providers. The regulated are also the only real audience of the regulators, since taxpayers have all the incentives to remain ignorant. Hence, the regulators’ on the job performance will be naturally defined with the regulated in mind, pushing the regulators to cater to the interest of the regulated. Finally, career incentives play a big role. The regulators human capital is highly industry specific and the best job for people holding that specific human capital are with the regulated. Hence, the desire to preserve future career options makes it difficult for the regulator not to cater to the regulated.

However, the same thing applies to economists as well:

If these are the reasons why regulators are captured, it is not clear why economists are not captured as well. While not all data economists use are proprietary, access to proprietary data provides a unique advantage in a highly competitive academic market. To obtain those data academic economists have to develop a reputation to treat their sources nicely. Hence, their incentives to cater to industry or to the political authority that controls the data are similar to those of the regulators. Second, outside of academia the natural audience of their work is either business people or the government officials applying some of that knowledge. The popularity and support among business people or the government gives credibility to a piece of research and the person who did it. Even if no researcher purposefully caters to business or the government, this selection will ensure that the most popular and successful researchers will be those who cater to business or the government. Finally, academic human capital is highly specific. Opportunities in consulting and careers outside of academia are not equally distributed. Economists who cater to business interests clearly have a larger set of opportunities.

Another, more subtle, source of bias arises from the publication process. In economics authors cannot do multiple submissions contemporaneously and manuscripts are subjected to many lengthy revisions. This extenuating process maximizes the power of the editor vis-à-vis the author. Thus, if a few editors are captured, this effect spreads out through the entire profession. In sum, economists face a pressure very similar to regulators, why shouldn’t they be equally captured?

In this paper I develop these arguments and provide some evidence consistent with the pervasiveness of capture of economists by business interests.

Prof Zingales looks at many aspects via which economists could be captured (and are captured). He also discusses ways via one could minimise this capture.

Intriguing stuff..

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