The Efficacy of Information Policy

September 30, 2008


Any microeconomic problem that draws national attention is likely to be approached in distinctive ways by the news media, the general public, scholars, and policymakers. Representatives of the media frequently describe economic problems as a debate—often cast in ideological terms— between advocates of the free market and advocates of an active government. Members of the engaged public call for solutions to address their sometimes conflicting interests. Scholars draw on research that conceptualizes and, if possible, quantifies the social costs and benefits of alternative policies to address the problem, including the alternative of no government action, and recommend the policy that would generate the greatest gain to society. Policymakers weigh various considerations, especially how their most powerful constituents would be affected, before deciding on a course of action. If policymakers can reach agreement, they enact a policy. The process is then repeated when the next economic problem arises.

If policymakers could be certain whether the policies they have previously enacted are benefiting the nation, they would not have to assess every economic issue from “square one” and could learn from past mistakes. Economists have helped build a valuable knowledge base, consisting of what is known in theory and in practice, about the gains and losses associated with the nation’s most important microeconomic policies. Recent contributions include Peter H. Schuck and Richard J. Zeckhauser’s (2006) analysis of social policies, which identifies common problems, “bad bets” and “bad apples,” that increase various programs’ costs and prevent them from achieving their social goals, and my 2006 book, which synthesizes the empirical evidence on government’s efforts to correct market failures and finds that the cost of government failure may be considerably greater than the cost of market failure.

In their thoughtful and constructive book, Full Disclosure: The Perils and Promise of Transparency (Cambridge University Press, 2007), Archon Fung, Mary Graham, and David Weil provide an in-depth assessment of government-mandated disclosure policies intended to reduce the costs to consumers created by imperfect information. In general, if consumers are uninformed or misinformed about the quality of a product or a service and if workers are uninformed or misinformed about the safety of their workplaces, they will make suboptimal consumption and occupational choices. Consumers’ choices could be distorted by false advertising and by firms’ failures to disclose relevant information about their products and services, including information that would enable consumers to assess the safety of potentially risky products. Similarly, workers may become injured or ill because firms have not disclosed information about the health risks at their workplaces. At the same time, truthful competitive advertising can lead to product improvements.

Federal, state, and even local governments have instituted policies to address the problems caused by imperfect information. The federal government has empowered regulatory agencies to direct firms to provide complete and accurate information about their products and workplaces and to ensure that consumer products and workplaces meet acceptable safety standards. Individual states and local governments have enacted a variety of policies to supplement federal policies, including “lemon laws” that enable purchasers of new automobiles to obtain a refund if their vehicle is hopelessly defective, occupational licensing to ensure that practitioners in hundreds of occupations are competent, and the like.

Fung, Graham, and Weil focus their coverage of information policy on the objective of “targeted transparency.” As they explain on pages 37–38, “targeted transparency represents a distinctive category of public policies that, at their most basic level, mandate disclosure (emphasis added) by corporations or other actors of standardized, comparable, and disaggregated information regarding specific products or practices to a broad audience in order to achieve a specific public policy purpose. Thus, targeted transparency does not require specific technologies, performance targets, or taxes. Instead, it relies on thousands of individual choices by information disclosers and users who interact to establish acceptable risk levels or improve organizational performance.”

The authors’ use of the term “disclosure” encompasses information policies that require firms to provide information about their product on labels and, where appropriate, to report government grades about certain attributes of their product (e.g., vehicle rollover safety) and service (e.g., restaurant hygiene). The government alert system to improve public safety and government-mandated report cards to improve public education are also considered to be a form of disclosure. Other information policies that are not covered by the authors include product and workplace standards, advertising regulation, and occupational licensing.

The central goal of the book is to provide constructive guidance to policymakers for crafting policies that work by identifying and explaining why certain disclosure policies are effective and why others are much less effective. My interpretation of the empirical evidence on the economic effects of disclosure policies, however, differs from that of the authors because I believe that no persuasive evidence exists proving any of the disclosure policies that the authors consider—or of other information policies that they do not consider—have been effective. Accordingly, I reach different policy conclusions.