April 29, 2014

The Futility of Cost Benefit Analysis in Financial Disclosure Regulation

From: The CLS Blue Sky Blog

By and

The following post comes to us from Omri Ben-Shahar, Professor at the University of Chicago Law School and Carl E. Schneider, Professor at the University of Michigan Law School.  It is based on their recent paper entitled “The Futility of Cost Benefit Analysis in Financial Disclosure Regulation” and is available here.  

A fascinating debate is emerging: should financial regulations be subject to Cost-Benefit Analysis (CBA) just as, say, environmental regulations are? In a recent article for the Journal of Legal Studies (here), we examined financial regulation’s crown jewel—mandated disclosure—and asked what would happen if CBA were applied to it.

Mandated disclosure is American law’s most common regulatory technique, nowhere more prominently than in financial regulation. Financial crises breed disclosure mandates, from the Securities Act of 1933, the Truth-in-Lending laws of the 60s and 70s, Sarbanes-Oxley in 2002, and now the Dodd-Frank Act. Disclosure is also favored in vast stretches of consumer-protection law, health law, privacy law, campaign finance law, conflicts of interest regulation, and much more.

Almost as striking as mandated disclosure’s ubiquity is the absence of evidence that its benefits outweigh its costs. Lawmakers require disclosure without serious CBA because it looks superfluous. Disclosure’s benefits seem obviously great, its costs seem obviously small, especially relative to other regulations.


The risk we identified is “tunnel vision”—a narrow perspective that encourages regulators to exaggerate the benefits of a proposed regulation. Tunnel vision comes from the ways a regulation may interact with other regulations, including those issued by other federal, state, and local agencies. In some areas, these interactions can be solved by a coordinator like OIRA—the White House Office of Information and Regulatory Affairs. OIRA reviews regulation from different agencies and can be a repository of institutional knowledge and of coordination. It can guide regulators and discourage them from going down blind alleys and reproducing old errors. But even OIRA might not be able to overcome the excessive accumulation of legislative disclosure mandates. At best, it ought to teach agencies the limited utility of the disclosure device.

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