Less Is More? Implications of Regulatory Capture for Natural Resource Depletion

Well-designed regulation can check politically driven ineciencies, but it can also ex- acerbate distortions if politicians capture the regulators. We examine the consequences of strengthening India's electricity transmission regulatory structure for groundwater ex- traction, where electricity is the key input, and we nd evidence of regulatory capture by politicians. Guided by our model, in which politicians of national and regional parties compete for parliamentary seats, we show that empowering regulators amplied distortions in groundwater extraction in favor of national candidates, who have greater incentives and abilities to co-opt the regulators. Using nationally representative groundwater data from India for 1996-2006, we estimate that regulatory capture led to a 2.75 meter additional de- cline in water tables in closely-contested constituencies won by national parties' candidates. The short-term cost in closely-contested regional constituencies is around an 18 percent re- duction in agricultural production.