Full disclosure: the Promise and Perils of Transparency: Book review

The image http://www.archonfung.net/Images/BookCoverImages/FullDisclosureCover.jpg cannot be displayed, because it contains errors.Here is a book review that has recently been published in Policy Magazine.

Book Review: Full disclosure: the Promise and Perils of Transparency, Cambridge University Press, New York.

By Fung, Archon, Graham, Mary and Weil, David, 2007.

Over seventy years ago Friedrich Hayek put information at the heart of the economic problem. While his point was the superiority of markets over central planning, economists like Kenneth Arrow in the 1960s and George Akerlof and Joseph Stiglitz a decade or so later focused on how markets could mishandle information, particularly where one party conceals important information from another, thus for instance producers often conceal information from consumers and managers often conceal information from shareholders.

The economics of information is now a vast literature. Yet, beyond demonstrating the potential worth of regulating to require better disclosure in various situations, economists have shown little interest in exploring exactly what such policies should look like.

Thus the authors of Full Disclosure, the Promise and Perils of Transparency began their task with a startling discovery.

When we searched for studies by other researchers, we found almost no literature analyzing targeted transparency [the authors term for specific disclosure regulation] across a range of policy areas (p. xiii).

The authors a political scientist, an economist and a lawyer survey eighteen ‘targeted transparency’ policy episodes, identifying successes, failures and the resulting policy lessons. One might have guessed the commonsensical principles that emerge, but its always worth checking ones intuitions with the evidence.

  • Targeted transparency must be user centred.
  • Successful policies focus on the needs and interests of users. They should also be focused on the capacities, and inclinations of disclosing organisations. They should seek to embed new information in the decision making routines of users and to embed user responses into the decision making of disclosers.
  • The policies must be politically sustainable.
  • Sustainability is a function of the respective powers of users and disclosers, particularly at the time when the regulation is introduced (typically at some time of perceived crisis). Powerful, well organised users help establish transparency regimes just as powerful well organised disclosers have the best chance of resisting them. Also, to be sustainable, the regulation should generate good information about its own efficacy and it should be updated and improved as it emerges. (p. 11).

In the authors’ analysis, the paradigm of success is Los Angeles hygiene regime which requires restaurants to display on their front window their hygiene grading as a simple A, B or C. With such pre-digested information so prominently out in the marketplace, virtue became its own reward or more to the point, vice became its own punishment. The publics unsurprising distaste for bad hygiene kicked off a vigorous race to the top.

Regulations identifying SUVs road stability also struck an important blow for road safety with the less stable SUVs suffering a sharp fall in demand and car makers responding with improved product safety. The authors also show how such disclosure regimes can fail, for instance because of their complexity, as in the case of pollution reporting.

Though I recommend this valuable book in an all too neglected area of policy, Id identify some important shortcomings.

Its repetitive. Its appendix outlines the eighteen case studies giving them 2-4 pages each. Relevant aspects of them are also dealt with in the chapters and they are then summarised again – often more than once in lengthy multi-page tables. Table 4.6 a “Summary of Effectiveness Research in Eight Selected Transparency Policies” is 14 pages long.

The theoretical bedrock of the book is the commonsensical idea that more information is better with some informal regard being had to the idea of the importance of simplicity and ease of reporting for disclosers. This isnt rooted in a rigorous economic framework which would be more meticulous in toting up costs and benefits. Despite offering the Los Angeles restaurant hygiene regulation as a clear success, the authors don’t put any effort into considering whether the improvements in hygiene might have cost more than they were worth, though I agree with their implicit assumption that it seems unlikely.

Given the books aims as a pioneering compendium for policy makers and analysts, I have no quibble with this strategy, though some more deliberate focus on costs, even if it were an informal one, might have reassured the purists a little. But given that such an informal framework has some costs, it also has benefits, most notably the scope it provides for informal hypotheses about where the new fashion for transparency might be beneficially taken. Unfortunately, the authors dont venture very far if at all beyond the precedents set by the case studies.

Ive argued for a more systematic approach to transparency policy and proposed policies that might help facilitate the emergence of better information about the quality of service offered by for instance hospitals, schools, investment advisors and even real estate agents. As illustrated by the Los Angeles restaurant hygiene regulation a healthier information flow can often set market forces loose to greatly improve on the results of command and control regulation. And why dont we require that firms workers compensation premiums be provided to prospective employees to enable them to judge those firms occupational health and safety records. Indeed we could go further by trying to set up a standard against which firms can report the results of the job satisfaction surveys most conduct in their workplaces (Gruen, 2002).

The main reason these kinds of proposals are not considered in the book is that they’ve not been implemented.

Well not yet anyway, and not in America. But since we’re at the beginning of this process, I would have liked to have seen at least a few chapters where the authors had spread their wings to explore ways in which targeted transparency could improve our policy armoury not least by lessening the need for the more prescriptive and intrusive regulation we have now.

A final criticism is that, like much writing on such matters, this book focuses on targeted transparency as the sovereign act of some regulating authority – typically a government. It would be wiser to see such action as a subset of the many ways markets can become better informed.

Even if the market doesnt fully inform its customers, in principle the best performers should have an interest in accurately reporting their own performance. At this point we run into something well known from the economics of information even if it appeared more compellingly as Greshams Law centuries before Hayek or even Adam Smith got going.

Good money drives out bad or as Akerlof has put it, the presence of hard to detect lemons can ruin what would otherwise be perfectly good markets. To provide useful comparisons, information must be standardised. And standards are a public good. But firms that perform relatively poorly have an interest in actively frustrating such a process. If they report at all, they need not lie though some might. They need only cherry pick to conceal unflattering information.

While the emergence of a standard requires a kind of collective action, it need not necessarily be government regulation. Governments or indeed other social leaders might agitate for the best firms to develop an auditable standard against which to voluntarily report. That would often place pressure on other firms to report similarly, helping nurture the emergence of the standard and driving the kind of product improvements that occurred in Los Angeles restaurants.

So suasion and collective action by market leaders might have received more attention alongside government regulation. It might enable us to learn more lessons like those in this book, but with more experimentation and reference to market needs and possibilities along the way.

Oh and less risk of government failure.

References:

Gruen, Nicholas, 2002. Economic reform renovating the agenda: with an example from the market for information, Australian Journal of Public Administration, 61(2):90105, June.

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2 Responses to Full disclosure: the Promise and Perils of Transparency: Book review

  1. swio says:

    “While the emergence of a standard requires a kind of collective action, it need not necessarily be government regulation. Governments or indeed other social leaders might agitate for the best firms to develop an auditable standard against which to voluntarily report. That would often place pressure on other firms to report similarly, helping nurture the emergence of the standard and driving the kind of product improvements that occurred in Los Angeles restaurants.”

    Are there any examples of this? The only one I can think of that works are satisfaction ratings on ebay. If non-government information policies only work very rarely then perhaps its not very relevant and their lack of mention of it is justified. Another example is the Heart Foundation but from what I have learnt about heart health I would regard that as an example of a market incentives producing a perverse outcome and an example of why non-government forces might not be able to produce these standards.

  2. There are oodles of examples.

    Standards generally are generated by way of co-operative effort in the private sector.

    The mortgage industry produced a methodology for reporting the ‘true’ cost of mortgages which involved all regular fees amortised over seven years. It was called the AAPR. The government came in and regulated for a new standard and stuffed it up – with a methodology that requires amortisation over the term of the loan – which is stupid from a number of respects, not least that loans are refinanced on average within about five years.

    But that having been said, governments, so long as they’re well motivated, can often improve the situation by promoting integrity in such measures.

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