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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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Discloser embeddedness: Transparency systems, like other kinds of economic and social regulation, aim to change the practices of targeted organizations in order to achieve specified policy aims. Standards-based regulatory systems send unambiguous signals to regulated parties concerning whether, when, and how to change their practices. Although market-based systems using taxes, subsidies, or trading regimes provide greater latitude in the responses chosen by regulated organizations, those systems also send unambiguous signals (for example, under SO2 trading, utilities must reduce emissions—whether by investing in scrubbers or purchasing “rights to pollute” from other utilities—to specified levels set by the EPA). Transparency systems, by contrast, do not specify whether, when, or how organizations should change practices. Instead, they rely on responses to new information by users whose subsequent actions create market or political incentives for disclosers. When information produced by transparency systems causes users to systematically incorporate new responses into their decision making that in turn change disclosers’ decision calculations, we say that new information has become embedded in user and discloser decision-making processes. Highly effective transparency policies, then, are doubly embedded. Though the context of discloser decisions differs from that of users, they can be understood using analytic concepts that parallel our account of user embeddedness.


In order to identify common features of regulatory transparency systems that affect their embeddedness and effectiveness, we analyze eight systems that vary widely in their regulatory objectives. These cases do not constitute a random sample. Out of all of the policies that fit our specific definition of regulatory transparency, we chose a set of policies that was relatively mature, distributed across substantive issue areas, featured good empirical studies, and varied in effectiveness outcomes.

Evaluating the resulting literature was difficult given the variation across policy 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 / 159 studies in methodology, empirical rigor, and comprehensiveness (that is, the scope of policy outcomes studied). Because of this variation, we could not undertake a meta-analysis. Instead, our review illustrates and refines our theory of embeddedness. This effort is a first step in the development of an empirically testable theory of the effectiveness of transparency regulations. We do not attempt to verify or disprove a mature theory. This step in theory development is necessary to lay the ground for other evaluations of individual transparency systems as well as additional comparative analyses.

The eight policies are:

• Corporate financial disclosure: Initially adopted in the 1933 and 1934 Securities and Exchange Acts, this system requires detailed financial disclosure in order to protect investors from hidden risks and to increase capital market pressure for responsible corporate governance.

• Restaurant hygiene quality cards: By requiring restaurants to post in their front windows government-determined letter grades reflecting health inspection findings, this 1997 Los Angeles County system (also used in St. Louis and North Carolina) seeks to reduce public health risks related to restaurant hygiene.

• Mortgage lending reporting: The 1975 Home Mortgage Disclosure Act (HMDA) requires banks to disclose information on mortgage lending practices by race, gender, and income level in order to reduce discrimination in lending.

• Nutritional labeling: The federal nutritional labeling law, enacted in 1990, seeks to reduce heart disease, cancer, and other chronic diseases both by changing shoppers’ habits and by encouraging companies to market healthier products.

• Toxics release reporting: The federal Toxics Release Inventory (TRI) of 1986 requires manufacturers to disclose annually how many pounds of toxic chemicals they release in air, water, or land in order to spur reductions of these emissions.

• Workplace hazards disclosure: This 1983 OSHA standard requires chemical manufacturers and employers to disclose risks to manufacturer users and workers to reduce dangerous exposures and encourage substitution to less hazardous chemicals.

• Patient safety disclosure in health care: Two states—New York and Pennsylvania—adopted hospital and physician report cards in the 1990s as a means of reducing medical errors.

• Workers notification of plant closing: This 1988 federal law requires employers to provide notice of impending plant closures to affected workers and communities in order to improve the reemployment prospects of displaced workers and economic recovery of affected communities.

Table 1 provides a brief description of each policy, its objective, the nature of information disclosed, and the primary disclosers and users.


Central Elements of User Embeddedness User embeddedness describes the degree to which information that is mandated in a disclosure system is integrated into the decision-making processes of a policy’s intended users. We posit that three factors influence the likelihood that information

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Published on behalf of the Association for Public Policy Analysis and Management The Effectiveness of Regulatory Disclosure Policies / 161 will become embedded in users’ decision-making: the information’s perceived value in achieving users’ goals; its compatibility with decision-making routines; and its comprehensibility.2 Relevance of information to users’ decisions: Many transparency policies provide facts that can substantially reduce health and safety risks or otherwise improve important choices. Nutritional labeling, patient safety disclosure, and restaurant hygiene rankings, for example, enable consumers to better act on existing preferences for healthy food, safe medical procedures, and clean restaurants. However, if consumers do not believe there is anything they need to know about nutrition, auto safety, or restaurant food safety, or believe they have few real choices, they are likely to ignore new information.3 Compatibility with user decision-making processes: For information to affect user decisions, it must be provided in a useful format, a timely manner, and in a location where users can find it. Format relates to the manner of information presentation— is it provided as detailed “raw data,” is it summarized at some more general level (or by third-party intermediaries), or does the government collapse information into simplified ratings, such as the five-star auto rollover rating system?

Availability of information at a time and place where users are accustomed to making decisions also increases chances that information will become embedded in routines (for example, fuel economy ratings on new car stickers are more accessible than rollover ratings on a government Web site). When choice and action coincide, information at that time and place is vital. When choice occurs in advance of action, information needs to be available prior to final commitments, for example, well in advance of home purchase closings or when employment contracts are executed.

Comprehensibility of information to users’ decisions: Even if valuable and compatible with users’ routines, information is unlikely to become embedded in everyday choices unless it can be readily understood (see, for example, Kristal, Levy, Patterson, Li, & White, 1998, for nutritional labels). Comprehensibility is a product of the congruence of the character of new information with the ability of users to take advantage of it. Here again, social context is critical. Incongruities in vocabulary, math skills, or interpretations of risk information can reduce the likelihood that information will become embedded in choices (for example, Kolp, Sattler, Blayney, & Sherwood, 1993, for workplace hazards). Research suggests that people have difficulty linking low probability risks with everyday decisions such as labor market or product choices (Viscusi & Magat, 1987; Viscusi & Moore, 1990; Hammit & Graham, 1999).

Cost of information collection: Acquiring and processing new information can be costly, although recent advances in information technology have reduced such costs substantially in some situations. Users may be more willing to invest time and effort in integrating new information into their choices when they perceive significant gain (Kleindorfer & Orts, 1998). Investors making important financial decisions, for example, may be willing to seek information about corporate financial risks even if The minimum number of users required for a policy to become embedded varies. Under systems operating through market mechanisms (for example, financial disclosure), information acting on the marginal user (investors) may be sufficient to elicit discloser responses. Transparency systems that operate via user actions in political realms may require a greater percentage of all users to tip the behavior of disclosers (for example, under the Home Mortgage Disclosure Act where a community or its representatives must be mobilized).

We assume that underlying preferences of users are not altered by most transparency systems. There are cases, however, where intensive education, training, or widely publicized crises change preferences, and an accompanying transparency system can help users act on those modified preferences.

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that means paying experts or wading through technical data. In general, though, if users must incur substantial costs in terms of either time or material resources to acquire information, they are unlikely to embed that information into their everyday choices (Weil, 2002).

Role of user intermediaries: Under several of the regulatory transparency policies we review—corporate financial disclosure, mortgage lending disclosure, toxic release reporting, and worker notification of plant closing—third-party intermediaries act as agents for individual users. Intermediaries can help collect and interpret information, thereby reducing its cost. If systems disclose information in technical formats, parties may simplify it. For example, environmental groups use disclosed government data concerning toxic pollution to create factory rankings and risk profiles that are electronically searchable by zip code. Third parties may also help package or simplify otherwise complex data, for example by enabling comparison between disclosers.

Evaluation of User Embeddedness Table 2 evaluates the degree of user embeddedness for the eight transparency policies given the above components that drive user embeddedness. Two of the eight policies produce information that becomes highly embedded in user decisions: corporate financial disclosure and restaurant hygiene grades. In both cases, the information is highly relevant to users (for example, financial information provides potential investors with the data necessary to assess risk and return), is provided at the right time, place, and location (for example, restaurant ratings are available in the window of the restaurant using a simple, graded format) is provided in a way that is readily understood and at relatively low cost. Note that in one of these cases—financial disclosure—third parties (investment institutions) play a key role as intermediaries.4 Information is moderately embedded in the nutritional labeling and mortgage lending disclosure for differing reasons. Nutritional labels provide information to consumers at the right time and place and at a low cost. However, many shoppers have a difficult time using that information to improve food choices. In the case of mortgage lending, few applicants seek data on bank lending practices by demographic characteristics when searching for mortgages. However, community organizations that champion access to home credit actively use the data to evaluate the lending practices of banks and present their findings to federal regulators who use fair lending as one criterion in their approval of bank mergers.

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