The paper presents a theory of regulatory capture, analyzing how interest groups can influence government decision-making. It develops an agency-theoretic approach to interest-group politics, focusing on the potential identification of a regulatory agency with the interests of a regulated firm and non-industry groups. The study shows that regulatory inefficiencies can arise from the pressures of multiple interest groups, and that the power of interest groups is not solely determined by their willingness to pay but also by the type of influence they seek. The paper highlights that interest groups may have more power when their interests lie in inefficient rather than efficient regulation, as inefficiency is measured by the degree of informational asymmetry between the regulated industry and the external monitor (Congress). The paper considers a model of a natural monopoly or cohesive industry, where the regulatory structure regulates the firm's rate of return and price. The firm has private information about a technological parameter and chooses an unobserved level of cost reduction. The regulatory structure is two-tiered: an agency (supervisor) and Congress (principal or external monitor). The agency has the expertise to obtain information about the firm's technology, while Congress relies on information supplied by the agency. The agency's expertise allows it to hide information from Congress to identify either with the industry or with the group of consumers affected by the price (output) decision. The paper discusses the effects of regulatory politics on the agency's incentive structure and discretion, the regulated firm's incentives and rent, and pricing. It also examines how these effects depend on the power of interest groups and the amount of resources appropriated to the agency. The paper shows that interest groups' pressures may offset or add up, and how interest groups affect each other's welfare. The paper analyzes the case of producer protection, where the firm can collude with the agency. It shows that collusion reduces social welfare and that the firm is given a low-powered incentive scheme. The paper also considers the case of multiple interest groups, showing that environmentalists can influence regulatory outcomes. It concludes that the power of interest groups depends not only on their stake and transfer costs but also on the type of influence they seek. The paper highlights that interest groups may have more political power when their interests lie in inefficient rather than efficient regulation.The paper presents a theory of regulatory capture, analyzing how interest groups can influence government decision-making. It develops an agency-theoretic approach to interest-group politics, focusing on the potential identification of a regulatory agency with the interests of a regulated firm and non-industry groups. The study shows that regulatory inefficiencies can arise from the pressures of multiple interest groups, and that the power of interest groups is not solely determined by their willingness to pay but also by the type of influence they seek. The paper highlights that interest groups may have more power when their interests lie in inefficient rather than efficient regulation, as inefficiency is measured by the degree of informational asymmetry between the regulated industry and the external monitor (Congress). The paper considers a model of a natural monopoly or cohesive industry, where the regulatory structure regulates the firm's rate of return and price. The firm has private information about a technological parameter and chooses an unobserved level of cost reduction. The regulatory structure is two-tiered: an agency (supervisor) and Congress (principal or external monitor). The agency has the expertise to obtain information about the firm's technology, while Congress relies on information supplied by the agency. The agency's expertise allows it to hide information from Congress to identify either with the industry or with the group of consumers affected by the price (output) decision. The paper discusses the effects of regulatory politics on the agency's incentive structure and discretion, the regulated firm's incentives and rent, and pricing. It also examines how these effects depend on the power of interest groups and the amount of resources appropriated to the agency. The paper shows that interest groups' pressures may offset or add up, and how interest groups affect each other's welfare. The paper analyzes the case of producer protection, where the firm can collude with the agency. It shows that collusion reduces social welfare and that the firm is given a low-powered incentive scheme. The paper also considers the case of multiple interest groups, showing that environmentalists can influence regulatory outcomes. It concludes that the power of interest groups depends not only on their stake and transfer costs but also on the type of influence they seek. The paper highlights that interest groups may have more political power when their interests lie in inefficient rather than efficient regulation.