The Benefits and Costs of Transparency: A Model of Disclosure Based Regulation

Abstract:     
The Enron scandal has raised questions regarding the adequacy of the present system of financial disclosure. At the same time, public policies increasingly use information disclosure as a regulatory device in a variety of areas beyond financial reporting. This paper provides a framework for evaluating whether disclosure-based regulatory systems improve over time, as measured by use, accuracy, and scope of information provided to users. The paper examines the benefits and costs of the provision of information from the disclosers' and information users' perspectives. It shows how these comparative benefits and costs affect both the initial architecture of disclosure systems and the interaction of disclosers and users once systems have been established. The combined effects provide the basis for predicting whether disclosure systems will improve over time.

Keywords: disclosure, regulation, transparency, risk

JEL Classifications: L51, K32, I18, D8, D82, G18, J28

Working Paper Series