But Who Regulates the Regulators?

Much criticism of “incompetent bureaucrats” implicitly assumes that those in the bureaucracy are pursuing the assigned goal but failing to achieve it due to lack of ability. In fact, they may be responding very rationally and ably to the set of incentives facing them.

For example, government regulatory agencies are often very ineffective in controlling the industry or sector which they have a legal mandate to regulate. But it is a common pattern in such agencies for those in decision-making positions to (1) earn far less money than comparable individuals earn in the regulated sector, and (2) after a few years’ experience to move on to jobs in the regulated sector. In short, they are regulating their future employers.

Under such a set of incentives, it is hardly surprising that decision-makers in regulatory agencies approach those whom they are assigned to regulate with an attitude that is sympathetic, cooperative, and even protective. The only protection of the public interest built into the incentive structure are the penalties for blatantly illegal conduct, such as taking bribes to make a particular decision for a particular company. But explicit bribes are seldom necessary in order to get the regulatory agency to adopt the general viewpoint of the regulated sector, in which many regulatory officials expect to make a more lasting and more lucrative career than is open to them in government.

Morally, it is possible to deplore individual weakness or selfishness, but rationally there is little reason to expect a different outcome from a normal sample of people facing the same structure of incentives. Reform by “throwing the rascals out” seems less promising than reform by changing the structure of incentives facing whoever occupies decision-making positions.

  • Knowledge and Decisions p. 31, Thomas Sowell

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