In this paper we address the issue of regulatory capture. Firms can seek to capture regulators by offering them 'post-regulatory' jobs at a higher wage than the regulator would otherwise receive. The firm is interested in such an arrangement if the profits from endogenous lax regulation exceed the cost incurred in higher wage payments. We show how the wage paid in the public-sector and a 'cooling-off period for regulators can be used in tandem to preempt such 'capture' of regulators. The legislator can choose to make ongoing public-service employment more attractive than employment in the regulated industry, or can 'convince' the regulator to leave the public-sector but remain conscientious during the regulatory period. The choice depends on the legislator's preferences between levying taxes to pay civil servants, and the curtailment of the civil liberties of the regulator. We apply the model to explaining the policies that are observed in different Western countries.
- Cooling-off periods
- Post-regulatory employment restrictions
- Regulatory capture