Static Versus Dynamic Disclosures, and How Not to Judge Their Success or Failure

• Publication year: 2021

STATIC VERSUS DYNAMIC DISCLOSURES, AND HOW NOT TO JUDGE THEIR SUCCESS OR FAILURE

Richard Craswell(fn*)

Abstract: Disclosure laws can serve many different purposes. This Article is the first to distinguish two of those purposes, which I call static and dynamic disclosures. In brief, static disclosures aim to improve consumers' choice from among the set of products that are already available on the market. By contrast, dynamic disclosures aim to improve the range of products from which consumers must choose, by sharpening sellers' incentives to improve the quality of their products.

The Article also discusses the various ways in which the effects of static and dynamic disclosures might be measured and evaluated. In doing so, it examines and mildly criticizes the position recently advanced by Professors Omri Ben-Shahar and Carl Schneider, who argue (approximately) that disclosure almost never works, and that it should not even be considered as a policy option. While I agree with much else that Professors Ben-Shahar and Schneider say, their claim that disclosures almost never work is far too broad.

INTRODUCTION ................................................................................ 334

I. BACKGROUND ........................................................................... 335

II. THE PURPOSE(S) OF DISCLOSURE ........................................ 337

III. SOME SIMPLE ECONOMICS .................................................... 340

IV. CRITERIA FOR SUCCESS: STATIC DISCLOSURES ............. 345

A. Measuring Static Effects ...................................................... 346

B. Lessons from the Data .......................................................... 347

C. Identifying the Costs and Benefits ....................................... 348

D. Do Static Disclosures Always Fail? ..................................... 350

V. CRITERIA FOR SUCCESS: DYNAMIC DISCLOSURES ........ 354

A. Some Examples .................................................................... 355

1. Credit Contract Scores .............................................. 355

2. Restaurant Grades ..................................................... 356

3. Automobile Fuel Economy Ratings .......................... 357

4. The Cigarette "Tar and Nicotine Derby" ................... 358

5. Food Labeling and Salad Dressing ........................... 358

B. Evaluating Success or Failure .............................................. 359

1. Gathering the Data .................................................... 359

2. Eliminating Exogenous Causes ................................. 362

3. Isolating the Effect of the Legal Requirements ........ 365

4. Designing More Effective Disclosures ..................... 370

5. Identifying the Costs and Benefits ............................ 371

VI. CRITERIA FOR SUCCESS: DISCLOSURE VERSUS QUALITY REGULATION .......................................................... 372

A. Restaurant Grades Revisited ................................................ 373

1. Disclosure Versus No Regulation ............................. 374

2. Disclosure Versus Direct Quality Regulation ........... 375

3. Asking the Right Question ........................................ 376

CONCLUSION .................................................................................... 379

MATHEMATICAL APPENDIX ......................................................... 380

INTRODUCTION

In this Article I have three ambitions. First, I hope to show that we cannot evaluate the success or failure of any disclosure law without considering the possible goals that law might have had. I do not take this point to be hugely controversial.

My second ambition, however, is to improve our understanding of two particular purposes that disclosures might serve. To this end, I distinguish here between what I will call static and dynamic disclosures. Static disclosures take a consumer's existing range of choices as more or less given, and aim merely to improve a consumer's choice from among the existing choice set. By contrast, dynamic disclosures seek to improve the existing choice set by creating incentives for sellers to improve the quality of their offerings. This distinction has not yet been discussed in the disclosure literature, but I hope to show that it has important implications for how the success or failure of disclosures can best be measured.

Finally, my third ambition is to illustrate the perils of trying to analyze disclosure laws without paying attention to the specific purposes that different disclosure laws might serve. To illustrate these perils, I use as a recurring example the recent and provocative Article, "The Failure of Mandated Disclosure," by Professors Omri Ben-Shahar and Carl E. Schneider.(fn1) It is perhaps unfair to single out this Article in such a way, for (as I discuss below) there is much that is good in the Article, and I agree with many of its conclusions. However, the systematic way in which that Article analyzes a wide range of disclosure laws (which is one of the Article's strengths) also makes it an ideal Article in which to find an occasional cautionary example showing what happens when the purposes of disclosure laws are not properly understood.

With that in mind, let us proceed. Section I, below, provides some necessary background by describing Professors Ben-Shahar and Schneider's views in slightly more detail, and by relating their Article to the rest of the academic literature on disclosures. Sections II and III then develop at more length the distinction I wish to draw between static and dynamic disclosures, with Section III providing an economic interpretation of that distinction. Finally, Sections IV through VI discuss in more detail some criteria for evaluating the success or failure of various kinds of disclosure, to show how those evaluations should differ depending on whether the disclosure has static or dynamic aims.

I. BACKGROUND

Mandatory disclosure, we are told, is a regulatory technique that is "much used but little remarked."(fn2) However, while I fully agree that disclosures are "much used," the case for them being "little remarked" is doubtful. Professors Ben-Shahar and Schneider themselves cite dozens of studies of the effects of various disclosure regimes; and they could easily have added more, had they not worried about overburdening their readers.(fn3) For example, mention should certainly be made of the 2007 book by Archon Fung, Mary Graham, and David Weil, which compiled eighteen case studies of various disclosure regimes.(fn4) Unlike Professors Ben-Shahar and Schneider, these authors came to a more mixed view of the efficacy of disclosures (some worked well; others didn't). Similarly mixed views can be found in the marketing literature, in several recent survey Articles and meta-analyses.(fn5)

Indeed, this concern with the possible effects of disclosure (both good effects and bad) is not even particularly new. Over thirty years ago, an Article in the Journal of Law and Economics began its discussion by observing that: Consumer protection regulation has come under increasing fire from Congress, the courts, and the business community. . . . One response to these charges has been a movement away from traditional forms of regulation and toward interventions that are more compatible with consumer and seller incentives. In particular, there has been increased interest in techniques which ensure that consumers have sufficient information to protect themselves against unsafe products or unfair seller behavior. . . . [However,] these simple prescriptions . . . mask many of the complexities involved in the ways in which information is communicated to consumers and the ways that consumers (and the market) respond.(fn6)

For all these reasons, I think a better interpretation of the "little remarked" comment is that it is a statement about what gets remarked in law school classes. On that point, Professors Ben-Shahar and Schneider are absolutely correct. Most law school curricula allot little if any time to issues of how (and whether, and with what effect) consumers' information might be improved. Indeed, I am struck by the fact that today, in 2013, we still make it very hard for any law student to graduate without getting at least a brief exposure to the rule against perpetuities, or to the important problems that arise if there are two ships in the world that are both named Peerless.(fn7) But it is entirely possible (and not even very difficult) to graduate from most law schools today without being exposed to any serious study of the costs and benefits of consumer disclosures. Thus, even if Professors Ben-Shahar and Schneider succeed only in bringing this issue to the attention of a new generation of law professors, that would be a real contribution. Of course, I hope they will succeed in other ways, too-but even if that were all they could do, it would still be impressive.

As should by now be apparent, I agree with roughly 85% of what Professors Ben-Shahar and Schneider have to say. In particular, I agree that disclosure requirements are used too often, are designed by institutions with little understanding of their potential pitfalls, and often produce small (or even negative) effects. I also agree that the apparent attractions of disclosure regimes sometimes offer lawmakers a convenient excuse for...