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Regulatory Capture Through Manipulation of Voter Preference

Abstract: I show that firms can use business activities to affect regulation through voters. The firm chooses the level of business activity that maximizes profit, which depends on the incumbent's regulatory tendency and effort. Business activities contain information about regulation, and the voter uses this information to form beliefs about the incumbent. The firm manipulates the voter into retaining regulators less often and deregulators more frequently, despite her preference for regulators. The voter obtains less regulation given sufficiently moderate incumbents but more regulation with extremist regulators and deregulators when the firm's business activity is politically informative. The firm's ability to affect regulatory politics, without directly engaging with politicians, is not necessarily bad for the voter -- the firm provides insurance against extremists by amplifying the voter's voice.  

[Work in Progress]

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