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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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Finally, a number of the policies—toxic release reporting, workplace hazard communication, patient safety disclosure, and worker notification of plant closing— have not become embedded into most users’ decisions. For example, information on factories’ toxic releases is seldom available to home buyers or renters at the time and place where it might have its greatest impact on behavior, at the time of searching for a home to purchase or an apartment to rent. A major problem of workplace hazards disclosure is that information is provided to workers in a highly technical format and after they have already made employment decisions. Unions or other agents do not provide, or are not present in most workplaces to provide, simplified The literature also indicates that socio-economic and educational factors affect user embeddedness in regard to all three factors mentioned above. Education and income seem to be particularly important in affecting embeddedness across users for nutritional labeling (Derby & Levy, 2001; Mathios, 2000), workplace hazards (Kolp, Sattler, Blayney, & Sherwood, 1993), and patient safety (Mukamel, Weimer, Zwanziger, Huang Gorthy, & Mushlin, 2004).

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metrics or advanced information about hazard conditions. Furthermore, many workers have very constrained workplace choices (exit) or limited abilities to translate concerns about exposure into changes in workplace practices or human resource policies (voice). Compounding these difficulties, cognitive biases may affect workers’ ability to act on the information about low-level risks (Hammit & Graham, 1999).


To become embedded in disclosers’ decisions to limit risks to the public or improve performance, users’ responses must be discernable through existing management tools and priorities. The degree of discloser embeddedness can also be evaluated along several key dimensions.

Impact of user decision on discloser goals: Disclosers change their practices only if they perceive that shifts in user behavior have an impact on core organizational goals. That is, to become embedded in disclosers’ decisions, they must sense that user actions will substantially affect their interests or be likely to do so in the near future. For private sector managers, core objectives often include improving profitability, market-share, and reputation. For public officials, objectives may include gaining constituency support, legitimacy, and trust. For example, factories required for the first time to disclose specifics of toxic pollution made commitments to reduce pollution in response to anticipated employee dissatisfaction and other reputational damage, but would have been unlikely to respond to residents’ relocation decisions.

Compatibility of response with ongoing discloser decisions: User responses, even if they affect core discloser goals, are likely to become embedded only if such responses are compatible with the way in which managers receive, process, and act on new information. Compatibility mismatches are sometimes process-oriented.

Hospitals may have no way to discern the character and degree of patients’ concerns about medical errors when no error-tracking system or patient-response mechanism exists. Compatibility mismatches may also be temporal. Auto manufacturers were slow to respond to poor rollover ratings in part because of long design cycles (often three to four years). Disclosure requirements may also alter disclosers’ decision processes as well as their decision outcomes. When legislated disclosure of toxic chemicals required chief executives to sign off on companies’ pollution reports, for example, some executives became aware of their company’s total toxic pollution for the first time and thereafter reviewed total pollution each year (Graham & Miller, 2001). Similarly, requirements that CEOs sign off on companies’ accounting reports, enacted after Enron and WorldCom bankruptcies, created new incentives for executives to scrutinize internal controls.

Ability to discern changes in user behavior: Disclosers can make changes only if they can discern user signals (behavior change) from the noise. Chemical companies may not be able to discern whether negative publicity about toxic releases stems from concerns about general releases or about carcinogens specifically. Studies have shown that many retailers analyze point-of-sale data in rudimentary ways (Fisher, Raman, & McClelland, 2000). As a result, food manufacturers may believe that declining sales of high-sugar cereals indicate that a competitor’s advertising is more effective, whereas shoppers may actually be responding to nutritional data.

Cost of collecting information regarding changes in user behavior: Disclosers, like users, face a benefit/cost choice in investing in information about user behavior.

The cost to disclosers of integrating information about user responses into manJournal 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 / 165 agement decisions must be sufficiently low to justify their efforts in relation to expected private benefits. Disclosers may be more willing to invest time and effort when they perceive clear opportunities to beat the competition or avoid damage to their reputations.

Disclosers’ changes in practices sometimes anticipate rather than respond to user actions. Where reputation is especially important to an organization (for example, in branded consumer product cases), disclosers often respond preemptively to a disclosure requirement. Corporate managers concerned with protecting market share or reputation often do so by attempting to predict the behavior of their customers, employees, or investors, for example by introducing lines of healthy products, reducing toxic pollution, or tightening corporate governance before the public responds (Graham, 2002).5 Evaluation of Discloser Embeddedness Table 3 evaluates the eight policies with respect to the key dimensions of discloser embeddedness. Only two of these policies—corporate financial disclosure and restaurant hygiene quality standards—have become highly embedded in discloser decisions. In these cases, disclosers have much at stake and a refined ability to discern changes in user behavior in response to disclosed information.

The other policies under review exhibited only moderate or low levels of discloser embeddedness. With regard to the mortgage disclosure system, banks and other financial institutions are unlikely to be actively aware of disparate lending practices in their day-to-day activities. Only at times of potential mergers—because of the synergistic effects of the Community Reinvestment Act—does this information become salient to the discloser. For several of the other transparency policies—nutritional labeling and patient safety, for instance—the difficulty of discerning the causes of user behavior change from other factors impedes discloser embeddedness. Finally, in the case of plant closing notification, the fact that closure decisions are made so far in advance of disclosure and for reasons that are usually not affected by users makes discloser behavior essentially disconnected from user responses.


We have shown that the degree of user and discloser embeddedness varies significantly across the eight policies. We now compare this appraisal of embeddedness to an evaluation of each policy’s effectiveness based on a comprehensive review of the relevant research literature. We have grouped transparency systems in three broad

groups according to their overall effectiveness:

• Highly effective: Research indicates that the transparency policy has changed behavior of most users and disclosers in a significant way and in the direction intended by policy makers;

• Moderately effective: Research indicates that the transparency policy has changed behavior of a substantial portion of users and disclosers in the 5 Preemptory responses of this kind are comparable to deterrence-related responses by parties under other forms of regulation (for example, Polinsky & Shavell, 2000). In both cases, the regulated actors’ behavioral change arises from anticipated actions by government inspectors (traditional regulation) or users (regulatory transparency). In the latter case, we still regard this as an instance of an embedded discloser response to anticipated user actions.

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intended direction but has also left gaps in behavior change and produced unintended consequences;

• Ineffective: Research indicates that the transparency policy has failed to appreciably change the behavior of users and disclosers or has changed behavior in directions other than those intended.

One important caveat to evaluating effectiveness should be noted. Transparency policies that embed information in user and discloser decisions may lead to changes in behavior but not necessarily in ways that advance intended policy objectives. In these cases, policies may have an effect on user and discloser behaviors yet not be effective in terms of desired policy outcomes. Three main obstacles potentially stand between user/discloser behavioral changes and achieving policy objectives. First, there may be differences between user goals and public policy goals so that disclosed information leads users to pursue objectives not intended by policy makers (for example, using nutritional information to pursue weight loss rather than improving nutrition). Second, discloser responses may be different than the policy intended, particularly where loopholes in transparency laws lead to paperwork responses rather than meaningful changes in discloser behavior. Finally, the same kind of user decision-making heuristics that justify transparency policies may also be associated with user misinterpretation and cognitive biases. Economists and psychologists have found that common shortcuts used to process new information about risk can lead to systematic cognitive distortions. For example, most people tend to overestimate risks due to rare cataclysmic events while underestimating risks associated with familiar events such as auto accidents and heart disease (Kahneman & Tversky, 1996; Kahneman, 2003). Disclosed information may not adequately account for—and in fact might play into—these biases.

In Table 4, we provide our assessment of the extent to which information provided by each policy is embedded in the decision processes of users and disclosers.

We then provide our assessment of the overall effectiveness of each policy, based on an evaluation of available studies, indicating whether those studies show the presence of an effect on user and discloser behaviors, and if so, the degree of effectiveness (moderate or high) revealed by them. A more detailed discussion of the literature cited in Table 4 is available from the authors.

Highly Effective Transparency Systems Based on our review of available research, three of the eight transparency systems have contributed to significant, long-term behavior changes by users and disclosers in the direction intended by policy makers. Although these systems have encountered problems and required major adjustments over time, evidence suggests that they share core strengths.

Corporate Financial Disclosure The system of financial disclosure deeply embeds information into the decision processes of both users and corporations. Institutional and individual investors use key indicators from quarterly and annual reports to inform stock purchases and sales. Securities’ analysts, brokers, financial advisors, and other intermediaries translate these reports into user-friendly data for clients. Internet-based systems customize information to suit the needs of investors and search-facilitating technologies improve its readability. Comparable formats are assured by government

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requirements and by evolving conventions of highly trained accountants and analysts. Company managers, in turn, track investor responses to their financial disclosures as a routine practice and respond to perceived investor concerns.

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