How Much Mandatory Disclosure is Effective?

Abstract

The debate over the effectiveness of mandatory disclosure regimes has reached a fever pitch as policymakers search for solutions to the problem of consumers’ failure to read standard form contracts. This article demonstrates the use of a randomized experiment to causally identify the effect of disclosure interventions on both contracting decisions and consumer understanding. The CFPB has embraced a data-driven approach to disclosure policy by conducting focus groups, survey testing and trial disclosures, but these methods fail to test how the quantity of disclosure affects consumer understanding, cannot identify how disclosures impact contracting decisions and are generally biased due to non-random selection. In the randomized experiment presented in this article, participants choose between service providers with identical full-text contracts, where one provider is assigned to show a varying number of disclosure warnings with a price discount. Participants are subsequently quizzed on the contract terms to estimate how much different quantities of disclosure improve consumer understanding. The results show that the number of warnings had a nonlinear effect: three warnings had little impact on contracting decisions but six warnings caused 20-30% fewer participants to choose the warned-of provider regardless of the discount size. Three and six warnings equally led to an improvement of 9-10% in consumer understanding, suggesting that a long list of disclosures induces cognitive overload.

Keywords: mandatory disclosure, contract law, consumer protection, experimental