Regulating Behavior off the Books: Perverse Effects of Requiring Disclosure

Rules requiring the disclosure of conflicts of interest supposedly enhance transparency, reduce information asymmetries, and protect consumers from biased information; but these rules can have perverse effects. Disclosure regulation may fail to resolve many of the problems that occur with biased information-exchange and it may even make matters worse. This chapter explains these perverse effects and then examines them in light of the literature on group dynamics and information sharing in groups. In doing so, this chapter provides lessons on the pitfalls of information exchange (between individuals or groups), and it highlights some interesting ways that people follow the letter – but not the spirit – of ethical standards.