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Most assume regulatory failure means capture—industry dominating its regulators through lobbying or corruption. But there's another failure mode that's more common and less visible: institutions losing the structural capacity to judge.
The regulated industry dominates the regulator. Decisions systematically favor incumbents over public interest. Usually involves corruption, lobbying, or revolving door employment.
Requires: Bad actors or corrupted incentives
Decision demand exceeds institutional processing capacity. Judgment gets substituted with rules, delegation, or paralysis. Can happen with entirely good actors and good intentions.
Requires: Only structural overload
Key insight: When we misdiagnose capacity collapse as capture, we apply the wrong solutions. Ethics reforms won't fix an institution that simply cannot process decisions at the required rate.
These signals often get misread as "bureaucracy," "incompetence," or "red tape"—when they're actually symptoms of institutions losing their ability to judge.
Complex situations get resolved by applying simple rules rather than exercising judgment. 'Policy says no' replaces 'let me think about this.'
Decisions get outsourced to consultants, algorithms, or external standards bodies. The institution stops judging and starts deferring.
Cases pile up, reviews get delayed, responses become templated. The institution can't keep up with decision demand.
Staff spend more time documenting decisions than making them. Process becomes the product.
Banks lobbied for deregulation and captured SEC
Regulators couldn't process complexity of new instruments at required speed
IRSA analysis: Both were true—but capacity collapse preceded and enabled capture
Regulatory capture—FAA delegated certification to Boeing
FAA lacked bandwidth to review all aircraft certifications in-house
IRSA analysis: Delegation wasn't corruption—it was structural necessity from underfunding
Political interference in public health guidance
Health agencies overwhelmed by decision volume in novel situation
IRSA analysis: Some failures were capture; others were pure capacity collapse under load
| Dimension | Regulatory Capture | Capacity Collapse |
|---|---|---|
| Root Cause | Bad actors dominating regulators | Decision demand exceeds processing bandwidth |
| Requires Corruption? | Yes—industry influence or bribery | No—can happen with good people and good intentions |
| Solution | Independence reforms, ethics rules, revolving door bans | Reduce decision load, increase insulation, protect judgment bandwidth |
| Visibility | Often visible—can identify captured relationships | Often invisible—looks like 'bureaucracy' or 'incompetence' |
| Recovery | Replace personnel, reform incentives | Restore processing capacity, reduce demand-to-capacity ratio |
| Warning Signs | Decisions consistently favor one party | Decisions become rule-based, mechanical, or delegated externally |
IRSA's research on Authority Capacity Collapse provides a formal framework for understanding how institutions lose the ability to judge—and what can be done about it.
The trunk paper explaining why institutions lose decision capacity under load
Read explainerThe formal companion: substitution invariant, authority hysteresis, optimisation paradox
Read explainerWhat substitutes for authority when capacity collapses—and why it looks like capture
Read explainerRegulations fail through two distinct mechanisms: capture (special interests dominating regulators) and capacity collapse (institutions losing ability to judge). The second happens without corruption—when decision demand exceeds processing capacity, institutions substitute faster mechanisms for judgment.
Capture is when industry dominates regulators through lobbying, revolving doors, or corruption. Failure is broader—it includes capacity collapse, where overwhelmed institutions substitute external constraints for internal judgment. Capture is one cause of failure, not a synonym for it.
Yes. When processing capacity is overwhelmed, even well-intentioned institutions structurally cannot exercise judgment—they substitute rules, defer to external parties, or simply fail to decide. This isn't moral failure; it's architectural failure.
Three approaches: (1) Reduce decision load—not everything needs institutional judgment; (2) Increase processing bandwidth—more staff, better tools, clearer decision frameworks; (3) Build insulation—structural buffers that protect judgment capacity from demand spikes.
When we see regulatory failure, we instinctively ask: "Who captured the regulator?"
But sometimes the better question is: "Did the regulator lose the capacity to judge?"
Misdiagnosis leads to wrong solutions. Ethics reforms won't fix an overwhelmed institution. And anti-corruption campaigns can actually make capacity collapse worse—by adding process overhead to already-constrained decision bandwidth.