The Revolving Door

ABSTRACT The revolving door between the government and the private sector has long been presumed to lead to the capture of regulators by industry interests. A growing body of empirical literature, however, either finds no conclusive evidence of a capture effect or finds evidence of an opposite effect that the revolving door indeed results in more aggressive, not less aggressive, regulatory actions. To account for these incongruous results, scholars have formulated and tested a new "human-capital" theory positing that revolving-door regulators have incentives to be more aggressive toward the regulated industry as a way of signaling their qualifications to prospective industry employers. But even with the insights offered by the human-capital theory, the prevailing analyses of the revolving door are still incomplete. This Article theorizes on yet another incentive created by the revolving door that deserves being recognized as a structural force inherent in the regulatory process: the incentive for regulators to expand the market demand for services they would be providing when they exit the government. This "market-expansion " incentive may manifest itself differently in different regulatory settings. In the enforcement setting, it may result in more enforcement actions, broadened jurisdictional reach of the enforcement actions, and higher penalties in the enforcement actions. In the rulemaking setting, it may result in agencies' expanded rulemaking authority, the use of flexible standards rather than bright-line rules, and agencies' preference for complex as opposed to simple rules or standards. This market-expansion theory represents a paradigmatic shift in conceptualizing the role of individual regulators in the regulatory process. Contrary to the prevailing analyses, which posit that revolving-door regulators take the industry's needs as given and merely respond to those needs, the market-expansion theory suggests that revolving-door regulators may exert efforts to expand the industry's needs. Recognizing this market-expansion incentive has important implications for a wide range of policy issues, including agency aggrandizement, overenforcement versus underenforcement, regulatory settlements, compliance monitors, private rights of action, and professional responsibility. INTRODUCTION A familiar phenomenon in American government and law, the "revolving door" (1) between the government and the private sector has been swinging hard in recent years. Since the beginning of President Obama's second term, several high-level government officials have walked through the proverbial door in both directions. Mary Jo White, a litigator who spent the last decade defending Wall Street banks and executives at the law firm Debevoise & Plimpton LLP, was confirmed as the new chairwoman of the Securities and Exchange Commission (SEC). (2) The departing chairwoman of the SEC, Mary Schapiro, became a consultant at the Promontory Financial Group, a high-powered consulting firm that draws nearly one-third of its senior executives from government agencies overseeing the financial industry. (3) Jack Lew, the new Treasury Secretary, once worked as a senior executive at Citigroup. (4) Former U.S. Trade Representative Ron Kirk stepped down to join the law firm Gibson Dunn & Crutcher. (5) Former Treasury Secretary Tim Geithner became president of the private equity firm Warburg Pincus several months after stepping down from his government position. (6) Going a bit further back in time, other top administration officials leaving the government for the private sector included Christine Varney, the antitrust chief at the Department of Justice, who stepped down to join the law firm Cravath, Swaine & Moore in 2011, (7) and Peter Orszag, President Obama's budget director, who joined Citigroup as a vice chairman in 2010. (8) Not only has the revolving door frequently made news headlines, but it has had a deep impact on the law. …