Defending Disclosure

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Scholar challenges the claim that mandatory disclosure is a failure.

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Expanding on their well-known law review article, Omri Ben-Shahar and Carl E. Schneider’s new book presents a full-bore attack on what some have called “informational regulation.” Their main argument is that regulatory strategies that require the disclosure of information usually provide what the title of the book nicely encapsulates: More Than You Wanted to Know. The subtitle hammers home their condemnatory conclusion: The Failure of Mandated Disclosure. Unfortunately, Ben-Shahar and Schneider overreach with their thesis, ignoring many situations where mandatory disclosure just might—and very often does—seem to work.

Ben-Shahar and Schneider present many well-written arguments to support their thesis. They provide cautionary tales and policy limitations that regulators (and scholars urging regulation) should acknowledge. For example, they demonstrate that policymakers often adopt mandated disclosure rules as a form of political compromise, leaving more effective regulatory strategies unconsidered or judged too difficult to enact.

Because mandated disclosures often generate large costs, they argue that the cure is often worse than the disease. Someone—usually a business firm or nonprofit organization—must expend effort and resources to produce and communicate the information. Others are then assumed to use this information for good reasons that yield positive social consequences. Yet theories about how the public might use information to produce positive outcomes are often contradicted by social realities and empirical studies. For example, Ben-Shahar and Schneider demonstrate that “informed consent” in medical practice and required financial disclosures in consumer loans often fall short of their intended purposes.

Informational regulation, of course, is only one tool in the legal toolbox. Governments may also directly regulate behavior by setting performance standards or requiring certain technologies (so-called “command-and-control”), or they may use various market-based regulatory strategies. In environmental law, for example, the government may attempt to control pollution directly, or may use a cap-and-trade approach to leverage the virtues of markets. The U.S. acid rain program highlights one success of cap-and-trade regulation.

Informational regulation, which either encourages or mandates disclosure, is also a market-based strategy. Supporters of informational regulation usually assume that markets and other diffuse social processes of persuasion can encourage certain behaviors. For example, a regulation may require disclosure of information about a firm’s performance without requiring a substantive standard to be met. Still, the encouragement or requirement to produce and disclose information may induce “reflexive” self-assessment and internal review within the firm. Examples include a government-sponsored environmental label that denotes energy efficient consumer products, such as Energy Star, or mandated reporting for a firm, such as under the U.S. Greenhouse Gas Reporting Program. These kinds of approaches may promote or “shame” companies to adopt more energy efficient, pollution-reducing practices. Disclosure of information about a product, such as requiring fuel economy estimates for cars and trucks, may transform the market for that product, though it is also true that one cannot rely on assumptions that informational disclosure will result in actual positive change in markets.

But Ben-Shahar and Schneider go further than to advise caution. They purport to demolish most, if not all, claims about the efficiency and efficacy of mandated disclosure in general. (They apparently don’t consider the potential benefits of regimes to encourage permissive disclosure.) Their most convincing arguments include the questionable benefits, unaccounted costs, and ideological compromises of mandated disclosure, as well as unwarranted assumptions about its advantages. Yet there are many examples of mandated disclosure successes not included in the book. What is so wrong, for example, with Energy Star, fuel economy standards, and greenhouse gas reporting?

Other everyday examples reveal limits to the authors’ thesis. Consider driver’s licenses, passports, and tax returns. Driver’s licenses and passports require disclosure of personal information. They regulate travel, but also support other regulatory ends, such as providing individuals with proof of age and identity, providing law enforcement with another way of tracking criminals, deterring drunk driving, and preventing terrorism. Tax returns also require informational disclosure from individual citizens and firms. Depending mostly on voluntary compliance with these informational demands, the financing of modern government depends in large part on mandated disclosure.

Do Ben-Shahar and Schneider demand abandoning all of these kinds of everyday informational regulation? Is one who defends the continued use of driver’s licenses, passports, and tax returns a disgraced “disclosurite,” the term of opprobrium they coin?

If these everyday cases of mandated disclosure pass muster, then informational regulation in other contexts might work as well. Again, Ben-Shahar and Schneider dismantle examples of “failed” mandated disclosure policies like “informed consent” in medical practice and mandated consumer loan disclosures. However, other well-accepted practices, such as mandated disclosure in securities regulation, may fare better even under close examination. Requiring accountant-certified reports on earnings, debt, and other business information does not eliminate, but likely reduces, incidences of fraud. If lies are told or material facts are hidden, disclosure of financial information also allows markets to better police themselves through private litigation as well as government enforcement.

A more recent example of a potentially successful mandated disclosure policy is the Dodd-Frank Act’s attempt to prevent “too big to fail” problems by requiring “systemically important” financial institutions to report financial information to the Federal Reserve. Even if it is true, as Roberta Romano argues, that Dodd-Frank requires many foolishly expensive new disclosure requirements, this does not mean all mandated disclosures are bad or useless—as Ben-Shahar and Schneider tend to presume.

Another misdirection in More Than You Wanted to Know is the authors’ conflation of disclosure required by informational regulations adopted by government (such as in securities regulation) and the proliferation of disclosed information provided by businesses in response to litigation risks. For example, the book features a picture of the Apple iTunes massive “scroll” of terms and conditions to which consumers click “I agree.” But to compare boilerplate written by private firms to government-mandated disclosure is to mix apples with oranges. There are no doubt some connections, but many of the terms in the iTunes “scroll” amount to legal self-protection crafted by private lawyers rather than disclosures mandated by governmental regulation.

Ben-Shahar and Schneider’s More Than You Wanted to Know represents a major contribution to the literature on informational regulation. However, it does not succeed in its rhetorical claim to prove a general “failure of mandated disclosure.” The book sheds light on many problems with mandated disclosure. Going forward, unrepentant “disclosurites,” like myself, who may continue to advocate informational regulation in some circumstances must heed the book’s warnings and concerns. Learning from past failures is the only way to build future successes, and mandated disclosure certainly does not always work. However, the baby of informational regulation should not be thrown out simply because the bathwater sometimes gets dirty.


This essay is part four of a seven-part series in The Regulatory Review entitled, Is Mandatory Disclosure Helping Consumers?

Eric W. Orts

Eric W. Orts is the Guardsmark Professor of Legal Studies and Business Ethics at the Wharton School of the University of Pennsylvania. He also serves as faculty director of the Initiative for Global Environmental Leadership and co-faculty director for the FINRA Institute at Wharton.