From Luigi Zingales writing in Capital Ideas:
Regulators depend on the regulated for much of the information they need to do their job properly, and this dependency encourages regulators to cater to the regulated. The regulated are also perhaps the primary audience of the regulators, as taxpayers and other citizens have much less incentive to monitor regulation, and generally remain ignorant. Hence the regulators will tend to perform their job with the regulated, rather than the public, in mind, further encouraging the regulators to cater to the interests of the regulated. Finally, career incentives play a big role. The regulators’ human capital is highly industry specific, and many of the best jobs available to them exist within the industries they regulate. Thus, the desire to preserve future career options makes it difficult for the regulator not to cater to the regulated.
If these are significant reasons regulators are captured, it is not clear why we economists should not be similarly susceptible to capture.
He goes on to cite three reasons economists might be “captured” by interest groups that don’t necessarily benefit from economists doing their best, most objective work all of the time. Summarized, these include:
1. Access to proprietary data often requires economists to develop a reputation that they “treat their sources nicely.”
2. Economists’ natural audience (outside of academia) includes business people and government officials.
3. Economists who cater to business interests have more opportunities for employment (highest paying employment, I might add).
Makes sense to me. Economists, like anyone else, aren’t immune to responding to incentives that might ask them to do something other than sound economics all the time.
The question this raises for me: How can economists, who themselves respond to incentives, critique the way others respond to incentives in any sort of “objective” way? I’ve actually had this question for some time, but I haven’t thought until now about how it relates to other aspects of my growing skepticism of “incentive talk.” Not only can we never be quite sure about what incentives people are responding to, but we ourselves respond to incentives in like manner–even with regard to how we do economics and incentive analysis.
Or don’t we?
Zingales has a longer working paper at ChicagoBooth.edu on this same topic. Worth a read.