Disclosure: Psychology Changes Everything

George Loewenstein, Cass Sunstein and Russell Golman
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Russell Golman: Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213

Annual Review of Economics, 2014, vol. 6, issue 1, 391-419

Abstract: We review literature examining the effects of laws and regulations that require public disclosure of information. These requirements are most sensibly imposed in situations characterized by misaligned incentives and asymmetric information between, for example, a buyer and seller or an advisor and advisee. We review the economic literature relevant to such disclosure and then discuss how different psychological factors complicate, and in some cases radically change, the economic predictions. For example, limited attention, motivated attention, and biased assessments of probability on the part of information recipients can significantly diminish, or even reverse, the intended effects of disclosure requirements. In many cases, disclosure does not much affect the recipients of the information but does significantly affect the behavior of the providers, sometimes for the better and sometimes for the worse. We review research suggesting that simplified disclosure, standardized disclosure, vivid disclosure, and social comparison information can all be used to enhance the effectiveness of disclosure policies.

Keywords: mandatory disclosure; regulation; behavioral economics; nudges; telltale heart effect; moral licensing (search for similar items in EconPapers)
JEL-codes: D03 D18 D82 D83 L51 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (70)

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