Sustainable Transparency The Political Economy of Disclosure

1. Sustainable Transparency The Political Economy of Disclosure Mary Graham, Archon Fung, David Weil Transparency Policy Project, JFK School of Government National Center for Digital Government and The Regulatory Policy Program Harvard University, Cambridge, MA May 12, 2003

3. 2003 Sport Utility Vehicles http://www.nhtsa.dot.gov/ncap

4. In a single vehicle crash, a vehicle with a rating of: • Has a risk of rollover of less than 10 percent • Has a risk of rollover between 10 percent and 20 percent • Has a risk of rollover between 20 percent and 30 percent • Has a risk of rollover between 30 percent and 40 percent • Has a risk of rollover greater than 40 percent

5. The Daily News of Los Angeles October 5, 1998, Monday, RESTAURANT RATINGS ARE HASH TO PUBLIC Melissa Schmitt Daily News Staff Writer The Daily News of Los Angeles February23, 2000 Wednesday, Valley Edition GLITCH ALLOWS RATS, ROACHES AND 'A' GRADE Troy Anderson, Staff Writer

6. Megan’s Law: sex offenders disclosure www.co.walla-walla.wa.us/sexoffenders.htm DANIELSON, Kevin Scott Kevin Danielson was convicted in 1989 in Oregon of Sex Abuse 1st for sexually molesting his father’s girlfriend’s three children, a female aged four and two males aged six and seven. In 1990 he was convicted of Burglary 2nd and Assault 1st in Walla Walla County, after breaking into the residence of an adult female where he threatened her with a knife and choked her into unconsciousness, then stole her car. Danielson has not completed any sex offender treatment. Psychological evaluations placed him at a moderate to high risk for re-offense. Terms of supervision include no contact with anyone under the age of 18 unless approved by Community Corrections Officer; curfew from 8:00 PM - 6:00 AM; no use of alcohol or frequenting of bars/taverns. White male, DOB/ 11-09-715'10", 190#, blond hair, blue eyes 100 block N. Spokane, Walla Walla Unemployed

7. Who Is Polluting Your Community? Reported Environmental Releases from TRI Sources in 2000 Rank Facility City Pounds 1 IDEAL TAPE CO. LOWELL 179,944 2 MAJILITE MFG. INC. LOWELL 70,800 3 BRADFORD INDS. INC. LOWELL 69,800 4 ADDEN FURNITURE INC. LOWELL 52,628 5 HOLLINGSWORTH & VOSE CO. WEST GROTON WEST GROTON 47,850 6 MILLIPORE CORP. BEDFORD 44,870 7 POLAROID CORP. WALTHAM 34,152 8 EXXONMOBIL CORP. EVERETT TERMINAL EVERETT 21,432 9 DUNCAN GROUP EVERETT 20,400 10 EASTERN CHEM-LAC CORP. MALDEN 17,715 11 CAMBRIDGE PLATING CO. BELMONT 15,510 12 LEE PRODS. CO. EVERETT 13,664 13 PRINTED CIRCUIT CORP. WOBURN 13,150 14 SANMINA CORP. WILMINGTON 12,433 15 WINFIELD BROOKS CO. INC. WOBURN 12,209 16 MILLIPORE CORP. BEDFORD 12,000 17 SUPERIOR PROCESS CO. INC. FRAMINGHAM 11,896 18 HAARTZ CORP. ACTON 11,790 19 SURFACE COATINGS INC. WILMINGTON 10,904 20 M/A-COM INC. LOWELL 9,149 Your Community:MIDDLESEX County Your Zip Code:02138

8. Financial Disclosure (SEC, 1933) Labor Management Disclosure Act (1959) Federal Election Act (1973) Home Mortgage Disclosure Act (1975, 1989) Automobile Safety Reporting (1978) Hazard Communication Standard (1983) Toxics Release Inventory (1986) Nutritional Labeling (1994) Medical Mistakes Legislation (not passed, 1998-2000) Megan’s Law (WA: 1990, CA: 1994) School Report Cards (national, 1994) Emergent Transparency

9. Common Features • Transparency policies mandate disclosure • By corporations or other actors • Of new, standardized, disaggregated information • Regarding specific products or practices • To a broad audience (not just the government) • For a regulatory purpose…

10. Regulatory Theory Public/User Behavior Change Discloser Behavior Change Law Info User pressures often improve extent of transparency

11. Big Question, Two Parts • What makes some transparency policies effective at changing discloser behavior and some not? • Part 1: Dynamics: Why do some transparency policies improve over time? • Part 2: Performance: Why do some transparency policies effectively change discloser behavior in socially desirable ways?

12. Specifying Improvement A system of regulatory transparency improves when: • Scope of disclosers/information increases relative to scope of perceived problem • The number of users increases relative to intended audience • The quality of information (accuracy, relevance, accessibility) improves

13. Political Impossibility? • Public interest (policy-maker’s) perspective: one tool among many. • Political puzzle: how can disclosure ever survive? • Stiglitz, Wilson, and many others predict failure b/c transparency imposes concentrated costs (upon disclosers) for the sake of dispersed benefits (for users)

14. Distinctive Politics of Transparency • Transparency regimes can create classes of beneficiaries among disclosers (thus weakening political resistance). • Competition and reputation (market) • Information for management (market) • Regulatory advantages (state) • Shaming and public reputation (politics) • Transparency regimes are sometimes supported by well-organized groups of disclosers (thus overcoming collective action problems).

15. Political Support… Many Disclosers Benefit High Political Sustain-ability User Groups Not Organized User Groups Organized Low Political Sustain-ability Few Disclosers Benefit

16. Political Support… Many Disclosers Benefit Financial Stds Hazard Communication HMDA Nutritional Labeling Medical Mistakes School Rpt. Cards User Groups Not Organized User Groups Organized TRI WARN FEC LMRDA Megan’s Law Few Disclosers Benefit

17. Case: Bank Discrimination • Problem: racial discrimination in lending • Law (HMDA, 1975): banks must disclose lending practices - how much and where • Used by community groups to document disparities, negotiate with banks, and press for further transparency • Banks discover new markets, create new products. • Banks that excel at low-income lending benefit • Sustainability: laws gradually demand more transparency, complemented by regulatory incentives to use the regulation (CRA, 1977)

18. Case: Union Corruption • Problem: Union corruption • Law (LMRDA, 1959): Unions must reveal financial and governance information to members • Disclosers: no benefit to union leadership, only downside cost • No organized interest groups to represent workers (against their leadership) • Result: very little use of LMRDA data - not very accessible • Result: transparency system has improved little in four decades

19. Distinctive Economics of Transparency • Transparency regimes, once in place, create a set of benefits and costs for disclosing parties • Benefits: Consumer benefits; Signaling; Penalty avoidance • Costs: Revealing information to competitors, regulators, public with different stakes • Transparency regimes create benefits and costs for users • Benefits: Information on risk, institutional behavior, other information with value to users • Costs: Collecting, interpreting and using information requires resources • As a result, “information thresholds” will emerge for disclosers and users.

20. MC MB I*D Benefits and costs of disclosure: Information disclosers Disclosing Party: Maximum information threshold MB/MC Info

21. MB MC I*U Benefits and costs of disclosure: Information users (1) MB/MC Info

22. MB MC I2U I1U Benefits and costs of disclosure: Information users (2) MB/MC Info

23. Economics of Transparency:What Drives Improvement? • Relation of the information thresholds of disclosers and users will determine the use of information at a point in time, and the dynamic towards improvement over time • The presence of third-parties for users will drive improvement (c.p.) • The presence of heterogeneity in the information provided by disclosers will drive improvement (c.p.)

24. Disclosing Party MB/MC MC MB Info I*D Information User MB/MC MB MC Info I*U I*D Case 1: No improvement in disclosure I*U > I*D: No impetus for disclosure system improvement Examples: LMRDA, Hazard Communication

25. Disclosing Party MB/MC MC MB Info I*D MB/MC Information User MB MC Info I*D I*U Case 2: Pressure to improve disclosure I*U < I*D: High pressure to improve disclosure system Example: Megan’s Law

26. Disclosing Party MB/MC MC MB Info I*D I1U I2U Case 3: Need for third parties If no third party (MBIND): I1U > I*D: No improvementIf third party (MBCOL): I2U < I*D: Improvement in information dis- closure Information User MBCOL MB/MC Example: HMDA MBIND MC Info I*D

27. I*D I**D I*D I**D Case 4: Dynamics of disclosers Disclosing Party MB/MC I*U < I*D  I*U < I**D Incentive for disclosure system improvement (sustainability) increases as a result of the shift in benefits to the disclosing party. MC MB2 MB1 Info Information User Example: TRI MB/MC MB MC Info I*U

28. Paths of Research • Voluntary systems, or only mandatory? • Performance and effectiveness • embeddedness hypothesis (bounded rationality) • pathways of impact (political, regulatory, market) • Regulatory synergies • Disclosure + command and control (HMDA + CRA) • Disclosure + market mechanisms (school vouchers) • Information technology • Reduce user costs • But, a host of complications…

30. Stage of Information-based regulatory System and key research question Core factors to be studied Creation of an information- based regulatory system:What factors account for the creation and initial structure of IBRS? • Nature of regulatory problem • Relation of information to regulatory problem • Political dynamics / coalitions Survival of the IBRS: What factors account for the survival of IBRS? • Role of market forces • Role of political forces Sustainability of the IBRS: What factors lead to the continuous improvement of IBRS? • Quality of information • Growth of 3rd parties • Use of information • Integration into decision-makingprocesses Performance of the IBRS:What factors lead an IBRS tochange the behavior of regulatedparties in desired directions? • Relation of information to behaviorsto be changed • Relation of changed behaviors to regulatory / policy ends A Framework for Studying Transparency Policy