Protection without Capture: Product Approval by a Politically Responsive, Learning Regulator

Abstract

When policy arrangements appear to favor well-organized and wealthy interests, should we infer “capture” of the political process? In particular, might larger firms receive regulatory “protection” even when the regulatory agency is not captured by producers? I model regulatory approval—product approval, licensing, permitting and grant making—as a repeated optimal stopping problem faced by a learning regulator subject to variable political pressure. The model is general but stylistically applied to pharmaceutical regulation. Under the assumption that consumers are differentially organized, but producers are not, there nonetheless exist two forms of “protection” for larger, older producers. First, firms submitting more applications may expect quicker and more likely approvals, even in cases where their reputations for safety are below industry average. Second, “early entrants” to an exclusive market niche (disease) receive shorter expected approval times than later entrants, even when later entrants offer known quality improvements. The findings extend to cases of bounded rationality and a reduced form of endogenous firm submissions. The model shows that even interest-neutral “consumer” regulation can generate protectionist outcomes, and that commonly adduced evidence for capture is often observationally equivalent to evidence for other models of regulation.