One of the most pervasive beliefs about the regulatory state is that information disclosure is cheap and efficient. With little cost, Energy Star ratings encourage firms to compete on energy efficiency, restaurant grades cause restaurateurs to improve food handling practices and calorie counts reduce overeating. With such simple market-mimicking cues, we get something for nearly nothing and avoid contentious issues associated with conventional regulation.
Yet this view is misconceived. Designing a good disclosure regime can be far from cheap.
There are of course the obvious costs for regulated parties. Each year, for instance, physician practices spend on average 785 hours per physician and more than $15.4 billion on reporting quality measures. Publicly traded firms can incur average costs of $2.2 million to comply with Sarbanes Oxley’s disclosure requirement for internal controls on financial reporting.
But far less appreciated is the fact that many disclosure regimes can have prohibitive costs on the regulators themselves. Implementing disclosure can shift agency resources in unanticipated and often pernicious ways, distorting the regulatory agenda. Consider what was once deemed a poster child for information disclosure, restaurant grading. In New York, due to a little known political compromise, grading shifted inspectors’ time away from the worst offenders to resolving grade disputes. Administrative appeals of grades spiked, flooding the dockets of administrative judges.