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«ABSTRACT Regulatory transparency—mandatory disclosure of information by private or public institutions with a regulatory intent—has become an ...»

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The Effectiveness of Regulatory David Weil

Archon Fung

Disclosure Policies Mary Graham

Elena Fagotto


Regulatory transparency—mandatory disclosure of information by private or public institutions with a regulatory intent—has become an important frontier of government innovation. This paper assesses the effectiveness of such transparency systems by examining the design and impact of financial disclosure, nutritional labeling, workplace hazard communication, and five other diverse systems in the United States. We argue that transparency policies are effective only when the information they produce becomes “embedded” in the everyday decision-making routines of information users and information disclosers. This double-sided embeddedness is the most important condition for transparency systems’ effectiveness.

Based on detailed case analyses, we evaluate the user and discloser embeddedness of the eight major transparency policies. We then draw on a comprehensive inventory of prior studies of regulatory effectiveness to assess whether predictions about effectiveness based on characteristics of embeddedness are consistent with those evaluations. © 2006 by the Association for Public Policy Analysis and Management


Regulation by transparency has become an important frontier of regulatory innovation. In the United States, the European Union, and developing countries, governments have designed disclosure systems to reduce financial, health, and safety risks; minimize corruption; protect civil rights; and improve public services. Consider the central role of transparency in responses to recent crises in the United States. In 1999, when an expert panel reported that medical mistakes killed at least 44,000 patients a year, recommendations for reforms focused not on mandatory standards or on market mechanisms, but on new transparency systems disclosing serious medical errors to the public. In 2000, when investigators found that the combination of tire failures and the top-heavy designs of popular sport utility vehicles triggered rollover accidents that killed hundreds of motorists, Congress required that the public be informed of the likelihood that each new model would roll over. When accounting scandals brought down companies like Enron and WorldCom in 2001 and 2002, Congress required that corporate finances be made more transparent to investors and analysts.

“Regulatory transparency” is the mandatory disclosure of structured factual information by private or public institutions in order to advance a clear regulatory goal.

Manuscript received November 2004; review completed December 2004; revised manuscript submitted April 2005; revision review complete May 2005; revised manuscript submitted May 2005; accepted May 2005 Journal of Policy Analysis and Management, Vol. 25, No. 1, 155–181 (2006) © 2006 by the Association for Public Policy Analysis and Management Published by Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/pam.20160 156 / The Effectiveness of Regulatory Disclosure Policies In the United States, nutritional labeling, public school report cards, restaurant grading systems, campaign finance disclosure, toxic pollution reporting, auto safety and fuel economy ratings, and corporate financial reporting are among scores of transparency systems created by federal and state legislators. Internationally, infectious disease reporting, food and tobacco labeling, and multi-national financial accounting are some of the disclosure systems designed to advance international regulatory goals.

The same policy justification underlies all of these systems. Government intervention that requires the disclosure of information by companies, government agencies, and other organizations can create economic and political incentives that advance specific public objectives. The rationale for government intervention starts with the premise that information asymmetries in market or political processes obstruct progress toward specific policy objectives. Asymmetries arise because manufacturers, service providers, and government agencies have exclusive access to information about products and practices and they often have compelling reasons to keep that information confidential. Private parties—journalists, representatives of consumer groups, or business competitors—can ferret out some of these secrets and make them widely available in news stories, rating systems, and advertising. But such efforts frequently fail to fully correct information asymmetries. When participants cannot themselves restore imbalances and when public disclosure of information can further a compelling policy objective, governments have increasingly chosen to intervene.

This article assesses the effectiveness of regulatory transparency systems. We begin with a framework for analyzing how new information can result in behavior changes by users that in turn lead to changes in the actions of disclosers through the operation of an “action cycle.” Regulatory transparency systems seek to introduce information into existing decision-making processes of buyers and sellers, community residents and institutions, voters and candidates, or other participants in markets or collective action. We characterize that decision-making as an action cycle involving information users and information disclosers. Transparency policies are effective only when information becomes embedded in this action cycle, becoming an intrinsic part of the decision-making routines of users and disclosers.

Based on detailed case analyses, we evaluate the user- and discloser-embeddedness of eight major transparency policies. We then draw on a comprehensive inventory of previous studies to assess whether predictions about effectiveness based on characteristics of embeddedness are consistent with those program evaluations. We conclude with a discussion of implications for policy makers and public managers seeking to use regulatory transparency policies in the future.


Under regulatory transparency policies, government collects information from public and private organizations or from individuals about their organizational processes, services, or products and transmits that information to the general public to advance specific public priorities. Regulatory transparency therefore differs from related policies such as warnings and other forms of “signposting” in that it does not simply require the provision of notice about potential hazards to users; it requires the provision of factual information and seeks to change users’ and / or disclosers’ behaviors in specific ways (Zeckhauser & Marks, 1996; Magat & Viscusi, 1992). It differs from government-mandated “sunshine laws” such as the Freedom of Information Act that impose transparency upon decision-making processes but do not seek specific regulatory aims (O’Reilly, 2000).

Journal of Policy Analysis and Management DOI: 10.1002/pam Published on behalf of the Association for Public Policy Analysis and Management The Effectiveness of Regulatory Disclosure Policies / 157 Regulatory transparency also differs from, but overlaps with, organizational report cards (Weiss & Gruber, 1984; Gormley & Weimer, 1999). Gormley and Weimer (p. 3) define organizational report cards as “a regular effort by an organization to collect data on two or more other organizations, transform the data into information relevant to assessing performance, and transmit the information to some audience external to the organizations themselves.” Some (but not all) regulatory transparency systems—such as school report cards—are also organizational report cards. Mandatory performance-related disclosure systems that do not have clear regulatory objectives are not, in our account, transparency systems.1 In addition, report cards focus on organizational-level performance, while our definition of regulatory transparency also includes the provision of information on products and services (for example, nutritional labels on food products and rollover ratings on automobiles) and individual behavior (for example, registries of convicted sexual offenders and records of contributions to political campaigns and candidates).

Transparency Policies and the Action Cycle Proponents of transparency contend that making information widely available in the public domain will inherently generate social benefits. In practice, however, information cannot be separated from its social context (Kahneman, Slovic, & Tversky, 1982). Individuals and organizations may simply ignore information that is costly to acquire or that lacks salience for decisions. They may also inadvertently use information in ways that fail to advance their own aims due to difficulties in processing new information or other sources of misunderstanding (Kahneman & Tversky, 2000). Providing usable information that can reduce risks and improve services is, therefore, anything but automatic. Whether and how new information is used to further public objectives depends upon its incorporation into complex chains of comprehension, action, and response.

In regulatory transparency systems, chains of action and response principally involve those who potentially use information produced by transparency policies to improve their choices; and those who are compelled by public policies to provide that information and whose behavior policy makers hope to change. These information users and disclosers are typically connected in a general action cycle with multiple steps. A transparency policy compels corporations, government agencies, or other organizations to provide information about their practices or products to the public at large. If this information is useful to individual users or groups they may incorporate it into their ordinary decision-making processes in ways that alter their actions. The original disclosers of information, in turn, may recognize in the changed choices of information users opportunities to defend or advance their interests.

The action cycle relates to research on the impact of organizational report cards (Gormley & Weimer, 1999) as well as related research on regulation through information disclosure (for example, Sunstein, 1993; Kleindorfer & Orts, 1998; Mitchell, 1998; Tietenberg, 1998; Sage, 1999). Gormley and Weimer focus on the validity of report card metrics and the accessibility of that information to users. Their evaluative criteria pertain to the utility of report cards to users (based upon characterisThemandatory nature of regulatory transparency policies also delineate it from voluntary systems evaluated in that literature. Although voluntary disclosure systems share some characteristics, the disparate incentives for parties to self-disclose under voluntary systems create different dynamics from those analyzed here.

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tics such as relevance and comprehensibility) and disclosers (particularly regarding report card functionality). By contrast, our approach focuses on users and disclosers (rather than information itself) and how disclosed information and resulting behavioral responses fit into their decision-making processes. We therefore place a greater emphasis on the context—for example, what does the user want, what are his/her choices and options, what are the costs of gaining the information—than upon the construction of the report card per se.

User and Discloser Embeddedness User embeddedness: Because of limited time and cognitive energy, information users acting rationally to advance their various, usually self-interested, ends may not seek out all of the information necessary to make optimal decisions. Instead, they seek information to make decisions that are good enough, using time-tested rules of thumb or “satisficing” behavior (Simon, 1997; Gigerenzer & Selten, 2001). Only information that penetrates these sometimes severe economies of decision-making affects the calculations and actions of information users. Transparency systems alter decisions only when they take into account these demanding constraints by providing pertinent information that enables users to substantially improve their decisions with acceptable costs. When new information becomes part of users’ decision-making routines despite the challenges of bounded rationality, we say that it becomes embedded in user decisions.

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