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U.S. Government Regulators May Be Favoring Their Future Private-Sector Employers

How does the “revolving door” between government and industry benefit firms? A new study co-authored by Yale SOM’s Ivana Katic finds that firms see a smoother regulatory process in the months before they hire a former regulator, suggesting that they may find favor via the promise of future employment.

This summer’s congressional hearings on AI regulation struck the Verge’s James Vincent as “dangerously friendly,” with senators welcoming the regulatory approaches suggested by top brass within the industry. As multiple commentators noted, this type of apparent warmth between regulators and industry leaders can raise the specter of “regulatory capture,” a situation in which the regulators charged with serving the public interest in fact fall beholden to private-sector interests.

Ivana Katic, assistant professor of organizational behavior at Yale SOM, has developed a strong research interest in regulatory capture, and the means through which corporations win it (or attempt to). With Amy Hillman, she published a review of the research literature that studies the tactics through which firms try to curry favor with regulators. In working on that review, Katic noticed that much of the literature focused on just two of these tactics, lobbying and proffering campaign contributions, and left many others underexplored.

In a new paper, Katic and her co-author, Jerry W. Kim of Rutgers Business School, investigate another strategy firms can use to achieve regulatory capture: incentivizing government regulators with offers of private-sector jobs.

“I come from a training in economic sociology, where we care a lot about networks,” Katic says. “I thought it would be really interesting to think about these networks being formed by people transitioning from public to private employment.”

Katic and Kim focused their analysis on government regulators who go on to join private firms as lobbyists, examining whether these individuals appear to help shorten the regulatory approval process for firms—either before or after they’re officially hired.

We’d expect that firms who are recruiting from government are learning more from their new employee about how they’re being regulated. But we’re seeing that the value of a revolving door is actually in the pre-recruiting period, which suggests that there could be some regulatory capture going on.

The timing of any such regulatory benefits has different implications for the ethics of the firm-regulator relationship. Former regulators who bring demonstrable benefits to firms after joining as an employee could well be offering their expertise in benign, above-board ways—by sharing their knowledge of the regulatory process, for example. On the other hand, regulators who benefit their future employers before being hired are more likely to be helping firms in unscrupulous ways—for instance, by favoring their future employers in the regulatory-approval process.

“These two possibilities are of quite distinct flavors, which is why we wanted to map this onto a timeline,” Katic says.

Going in, the researchers expected that both types of benefits would accrue to firms who hired former regulators, thereby helping to smooth the regulatory approval process for these firms both before and after welcoming their new hire. “We thought both mechanisms seemed plausible and reasonable, and we expected both of them to pan out,” Katic says.

But the researchers’ findings rule out the benign flavor. Their analysis revealed that firms hiring former regulators received regulatory benefits only in the two-year window before their transition from regulator to in-house lobbyist—and none in the period after the transition.

“It’s a little unsettling,” Katic says. “What we’d expect if this were all business as usual would be that firms who are recruiting from government are learning more from their new employee about how they’re being regulated. But that’s not what we’re seeing; we’re seeing that the value of a revolving door is actually in the pre-recruiting period, which suggests that there could be some regulatory capture going on.”

In investigating whether—and when—regulators revolving into the public sector brought benefits to firms, the researchers zeroed in on an especially heavily regulated industry: agribiotechnology.

Specifically, they tracked nearly 13,500 planting approvals by the U.S. Department of Agriculture of genetically engineered crops between 1998 and 2017. The researchers drew from a public database called the Biotechnology Regulatory Services Permits and Notifications Data, published by an arm of the USDA-APHIS, which contains information about the dates on which planting requests were received and issued. As their measure of firms’ regulatory outcomes, they used the time required for gaining regulatory approval.

To capture the links between agribiotech firms and the USDA, the research team pulled lobbying records from Open Secrets. Thanks to the 1995 Lobbying Disclosure Act, anyone who takes a job as a lobbyist must disclose any previous employment within the U.S. government. Their sample included 42 “revolvers” – individuals who transitioned from the USDA to agribiotech firms.

The researchers discovered that their initial hypothesis—that firms would see benefits before and after hiring regulators—was only partially correct. Individuals transitioning out of the USDA regulatory role and into an in-house lobbying position did appear to benefit their hiring firm, but only within the two years pre-transition—when the regulatory approval time for a genetically engineered crop was an average of 4.2 days shorter.

The researchers note that, since past research has estimated that each day a genetically engineered crop spends in regulatory purgatory costs the firm up to $2 million in revenue, this level of favor from would-be hires within the USDA could save more than $8 million for the firms who benefit from the revolving door.

Once the regulators actually transition to their new in-house lobbying jobs, however, the benefits to firms disappear.

In the paper, the researchers point out that most of the institutional safeguards currently in place to stamp out regulatory capture focus on the post-transition period; for example, former officials are banned from lobbying their prior colleagues for a specified period. They note that insofar as their study found no benefits to firms in that post-transition period, this could be an indication of these safeguards’ effectiveness.

“At the same time, finding any evidence suggestive of regulatory capture, however short-lived, is concerning and suggests that interventions focused on the pre-transition period are needed as well,” the researchers write.

Katic argues that stricter transparency is required to clarify where, specifically, government officials go to work after leaving the public sector. Though the Lobbying Disclosure Act is a start, she says, government agencies could better track suspicious patterns in the regulatory process if those agencies themselves were collecting the data on where their former regulators are working. That way, they could perform post-hoc analyses to uncover whether an official has ever advantaged their future employer. They could also share this more-detailed data with the public.

“Sunshine is the best disinfectant,” she says. “Publicizing this type of information would allow journalists, media watchdogs, and academics to scrutinize the data and look backward, thinking about the regulatory capture mechanisms—and consider whether there is anything more that could be done in the future.”

Department: Research