The Limits of Mandatory Disclosure Laws
Mandatory disclosure of information is that rare policy embraced by left and right alike. Liberals see disclosure as empowering the little guy, while conservatives view it as improving market efficiency. To combat obesity, Congress requires disclosure of calorie counts on food packages. To improve medical care, Medicare discloses hospital and physician group ratings. To make home buying more transparent, there’s disclosure of mortgage terms. Consumer Financial Protection Bureau Director Richard Cordray was stating the consensus at a hearing last year when he said, “Disclosure is one of the best tools government agencies can use to improve the operation of the marketplace.”
But is mandatory disclosure really that beneficial? During the housing bubble, having to sign 50 documents stuffed with financial disclosures didn’t stop people from taking out ill-advised subprime loans on overpriced houses. An alarming number of female college students are still attacked on campuses despite the federal Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, which imposes stiff crime reporting obligations on school administrators. And disclosure forms in routine transactions, from getting a car fixed to signing for a FedEx package, have become meaningless annoyances.
A new book, More Than You Wanted to Know: The Failure of Mandated Disclosure, takes the critique one step further: It argues that mandatory disclosures aren’t just useless but outright harmful in many cases. The authors are Omri Ben-Shahar, a contracts expert and professor at the University of Chicago Law School, and Carl Schneider, a bioethicist who teaches law and medicine at the University of Michigan. “Mandated disclosure is so indiscriminately used with such unrealistic expectations and such unhappy results,” they write, “that it should be presumptively barred.” Doing so, they add, “would spare the world much pointless regulation and might help drive lawmakers—legislatures, administrative agencies, and courts—to search harder for solutions actually tailored to problems.”
Before making the hard case that disclosure can harm, the authors make the easy one that it’s often useless. Consider the terms and conditions of Apple’s iTunes Store—that pop-up window of tiny-type lawyer language you must agree to before Apple will let you buy a 99¢ song. Ben-Shahar printed the whole thing out. It’s 32 pages. Among other things, it protects Apple’s copyright, guards it from lawsuits, and prohibits use by children under 13 except through schools. (Who knew?) “Comprehending all its terms would take novices not hours, but days,” the authors write.
Almost no one does that: One study of software websites found that only one or two shoppers in a thousand even glance at end-user license agreements. “Taking on even a trickle of the flood of disclosures can mean drowning,” argue Ben-Shahar and Schneider. The practical result is that we’re forced to choose between searching through legalese for hidden gotchas or blindly signing away our rights. Although it’s intended to empower consumers, disclosure benefits corporations that can bury what they like in those forms—arbitration agreements, the right to sell your e-mail address—sight unseen.
Backers of disclosure say the answer is to make forms simpler. The Consumer Financial Protection Bureau, created by the Dodd-Frank Act of 2010, drew on behavioral economics to draw up shorter, plain-English mortgage disclosure forms in 2012. That would be great if the government’s painstakingly improved form weren’t just one of dozens that still need signing at closing.
Many of the decisions we’re asked to make can’t be boiled down to easy reading. To make a truly informed decision about, say, whether to have prostate surgery or a mammogram would require a medical degree. If disclosure is meant to educate people to evaluate the advice of physicians and other experts, it’s not up to the task. The authors quote a 2009 speech by former Federal Reserve Chairman Ben Bernanke: “Some aspects of increasingly complex products simply cannot be adequately understood or evaluated by most consumers.”
This is where we cross into the tricky argument that some disclosures can be harmful—that they falsely reassure people that their interests are being served, create costly paperwork burdens with little to show for it, lead to cheating, and misdirect energies that would be better spent correcting problems instead of just exposing them, the authors say.
To illustrate the false-reassurance problem, Ben-Shahar and Schneider cite an experiment in which people were asked to estimate the number of coins in a jar. Their “advisers” were given a financial incentive to get them to guess too high. Paradoxically, people who were informed of their advisers’ conflict of interest were more likely to be swayed by their bad counsel, perhaps mistakenly assuming that the disclosure would make them more honest. The parallel to disclosures by real-world financial advisers is obvious.
Disclosure can also encourage people to game the system to make themselves look better. School administrators have been caught reclassifying students as disabled so they don’t drag down their schools’ reported test scores. After New York State started reporting hospitals’ cardiac surgery mortality rates, the Cleveland Clinic in Ohio “found an uptick of very difficult cases coming from New York State,” says David Dranove, a professor at Northwestern University’s Kellogg School of Management.
Finally, Ben-Shahar and Schneider say, disclosure has become a substitute for good policy: “One of its great costs has been that it helps lawmakers avoid working toward effective regulation.” For years, the federal Truth in Lending Act let banks charge high loan refinancing fees as long as the terms were fully disclosed. The Dodd-Frank Act finally changed that, barring “unfair, deceptive, or abusive” practices. Even Congress is coming around to the idea that revealing questionable behavior isn’t the same as stopping it.
Behavioral economists say these anti-mandate arguments go too far. One skeptic is University of Chicago Booth School of Business economist Richard Thaler. “No one argues that disclosure is a panacea. But disclosure, if done right, can be an alternative to heavy-handed regulation,” he says.
Ben-Shahar and Schneider say companies will disclose information voluntarily or risk being shunned by consumers. But that might not always be true. Brigitte Madrian, an economist at Harvard’s Kennedy School of Government, says mandates ensure that the data are universal and consistent, like miles per gallon stickers on new cars and energy ratings on dishwashers. Cumbersome and annoying as it sometimes is, disclosure may be worthwhile if it enables just one alert customer to raise an alarm for all. In 2009, Facebook quietly asserted rights to posts and photos in closed accounts, but backed down after the Consumerist website spotted the change in the terms of service. In other words, there’s no question that knowledge is power. Up to a point.