Many corporations have gotten good at pulling the levers of government to tilt the odds in their favor, weakening regulations or securing perks, justified or not, to further their business interests. Economists use the term "regulatory capture" to describe the phenomenon whereby regulatory agencies serving the public instead end up advancing the interests of the companies they regulate. The main way companies accomplish this, economists theorize, is through lobbying and campaign contributions that convince legislators to pass laws in their favor.
Once those laws are passed, however, it's less clear how companies sway the regulatory agencies that enforce them, which are more isolated from the direct effects of money or persuasion.
“If a company can get enough farmers to support the product and they write letters, then the USDA is going to listen.”
"Traditional theories of regulatory capture cannot be used the same on agencies," contends Shon R. Hiatt, an assistant professor at Harvard Business School. "There are a lot of checks and balances and firewalls in place."
So how are these agencies influenced?
Hiatt, who grew up on a dairy farm in Idaho, began asking that question through research on the controversial issue of genetically modified organisms (GMOs), agricultural products that are genetically altered to increase yield, incorporate pesticide properties, or exhibit other beneficial qualities. (Calgene's Flavr Savr tomato was the first genetically modified product to come to market, in 1992.) However, the organisms also potentially carry health and environmental risks. After reading about these dangers, Hiatt wondered how the US Department of Agriculture (USDA) decides which GMOs to approve—and how agribusiness influences the process.
Traditional Theories Break Down
As Hiatt began investigating, he found that traditional theories of capture such as lobbying and campaign contributions had little effect on whether any particular GMO was approved. Even more direct means of influence such as scientific articles funded by industry or letters written by industry-friendly congresspeople were equally ineffective.
What did seem to affect the approval process, however, was the influence of third-party groups separate from Congress and industry, to which the department looked to justify its decisions.
We may think the primary goal of agencies such as the USDA is to protect public health and safety; based on previous economic theory, however, Hiatt started with a different assumption—the primary goal of an agency is really to protect its own legitimacy. After all, it's the perception of an agency's effectiveness by Congress and the White House that will determine its budget and the career trajectory of its top officials. Of course, there is an overlap between the appearance of doing a good job and actually doing one. "If the USDA weren't doing its job, it would have very little legitimacy," says Hiatt. But that subtle difference in perspective also has the potential to distort the agency's reliance on pure science in its approval of GMOs.
In his working paper "Lords of the Harvest: Third-Party Signaling and Regulatory Approval of Genetically Modified Organisms, written with Sangchan Park, an assistant professor at the National University of Singapore, Hiatt identifies two types of legitimacy important to the USDA. The first, "consequential" legitimacy, is the perception that the process produces effective results; the second, "procedural" legitimacy, is the perception that it is fairly following the rules of the process.
In both cases, the researchers found that the department looked to outside stakeholders in order to establish that legitimacy.
In the case of consequential legitimacy, Hiatt and Park found a strong influence of farmers associations, such as the Iowa Soybean Association or the Kansas Corn Growers Association, which have the power to judge whether the GMOs are performing as intended without side effects. While these groups might have some industry members, they are separate from the agribusiness companies that are introducing GMOs. In cases where they supported a particular organism, there was an 84 percent increase in the likelihood of approval.
"If a company can get enough farmers to support the product and they write letters, then the USDA is going to listen to that and say, 'We have to keep our stakeholders happy,' " says Hiatt.
Other Agencies Influence Approvals
In the case of procedural legitimacy, the researchers found a strong influence from an unlikely source—the USDA's sister agency, the Food and Drug Administration. In the process of approving GMOs, companies have the option of consulting with the FDA to design nutritional labels for their products, earning a certificate of approval when they address FDA concerns. "They get these consultations and they are somewhat meaningless—they have little to do with the USDA approval process," says Hiatt.
Regardless of that fact, however, Hiatt and Park found that a positive endorsement by the FDA had a huge effect on USDA approval, increasing the likelihood by 157 percent.
Hiatt hypothesizes that in addition to receiving nutritional information on the GMOs, getting the green light from another agency might help insulate the department from criticism. "The USDA could be looking for a scapegoat," he speculates. "A positive signal from a fellow bureaucratic actor could diffuse the blame and provide political cover were the department to approve a faulty product."
These effects seemed to be even higher during instances where there was significant controversy or uncertainty. In cases where there were protests by activists over a particular GMO, the researchers found that the overall percentage of approvals went down, but the degree to which a positive endorsement by farmers associations increased the likelihood of approval by117 percent.
Results were even starker during a congressional election year, in which a heightened political environment presumably casts more scrutiny on agency decisions.
In those cases, farmers associations' influence increased the likelihood of approval by a whopping 400 percent. In addition to increasing the likelihood of approval, says Hiatt, third-party endorsements shorten the approval period. With farmers' approval, agricultural companies shaved about 162 days off the average approval time; with FDA consultation, they cut it down by about 257 days. That can translate to big bucks for companies.
"The average seed company earns about $2 million per day of revenue for high- selling GMO crops such as soybeans," notes Hiatt. "That's a substantial amount."
He stresses that these findings only concern the USDA, and only GMO approval; more research is necessary to determine whether the effect of third-party stakeholders on the USDA has an effect on other agencies or other policy issues. Conceivably, the same findings could hold true for other agencies: for example, the influence of doctors associations on the FDA drug approval process or consumer bureaus on rate increases by public utilities commissions.
Regulators Must Recognize Influencers
To the degree these third-party stakeholders do have influence, it complicates the traditional models of regulatory capture. On the one hand, it is perhaps a relief for democracy if companies don't have such direct influence on the process. On the other, it opens up the possibility that firms could capture these third-party actors instead—for example, drug companies influencing doctors with incentives for prescribing drugs or sponsoring medical conferences.
Perhaps the larger lessons from Hiatt and Park's research, however, concern regulators themselves. It's important that agencies such as the USDA realize their susceptibility to these outside influences, less they short-circuit their reliance on scientific procedures. That is just what happened with the approval of GMO alfalfa and sugar beets: both received positive signals from farmers and the FDA, and were approved by the USDA. But environmental groups protested that these products were approved without a full environmental review, successfully suing to take them off the market. (Alfalfa was subsequently reapproved after a multi-year delay. Sugar beets are still pending approval.)
"Regulators need to be aware of the influence they are putting on these stakeholders and other regulatory agencies," says Hiatt. "In those cases, it's even more important they follow the same scientific procedures they usually do. If they find themselves cutting corners, they could run into problems."