- Email: [email protected]
Wesley A. Magat and W. Kip Viscusi, 1992, informational approaches to regulation
Book
Reviews
Wesley A. Magat and W. Kip Viscusi, 1992, Informational Approaches Regulation (MIT Press, Cambridge, MA).
201
to
This is the first in the ‘Regulation of Economic Activity’ series initiated in 1981 to draw attention explicitly in its title to informational aspects. Comparison with the literature reviewed by Besanko and Sappington (1987) reveals specialisms, emphasizes the need to widen the scope of formal research, and suggests some new approaches to designing regulatory policy. B-S surveyed contributions on designing regulatory policy with limited information. The limitation was on the regulator’s information about technological and demand conditions, for the most part in natural monopoly settings. Their broad conclusion was that optimal regulatory policy differed significantly in these circumstances from regulatory models where the regulator is assumed to be perfectly informed about the environment. They judged this to be “a relatively new field of research” (p. 71) and it would seem to remain so: Kenneth Train’s otherwise excellent coverage (1991) of optimal regulation brushes aside information asymmetries and the regulator’s beliefs. M-V in contrast focus on information provision to alter economic behaviour: “Whether it be in the home, the workplace, or the supermarket, Americans are constantly confronting information mandated by various government laws and regulations . . [However,] we are only beginning to understand how to effectively use information policies in situations where consumers and workers lack adequate information” (Preface). M-V explore economic and cognitive issues that pertain to the information transfer mechanisms involved. They provide new insight into how people respond to risk information and suggest guidelines for information provision policies. The hope that the pervasiveness of the information-theoretic aspects would be breaking down the specialisms with their theoretical compartmentalization is quickly dashed. There is not a single common item in the quite lengthy reference lists in these two books. Linking of the formal research programs could, therefore, be beneficial. The least satisfactory feature of the formal research surveyed by B-S is its treatment of the information processes involved: how do the regulator and the regulated learn and at what cost? Static asymmetries need to be replaced by on-going learning processes, comparable to those M-V investigate. With information processing in all its forms now the dominant resource-using activity, much more explicit attention to the informational approaches in both theory and regulatory practice is warranted. The primary M-V case study is the use of product labels to reduce the health risks of hazardous pesticides and chemicals. Their second case study pertains to carcinogenic food substances warnings. Their final empirical study shifts from health risks to those involving only financial losses and examines home energy audits, addressing the format and structure of the
202
Book Reviews
energy efficiency information presented and its effect on consumer behaviour. This is thorough interdisciplinary work, drawing upon economics, psychology, decision sciences and marketing. It should put pay to the notion that informational regulations are a failure. They need not fail, provided due attention is given to the M-V findings that are concerned to achieve communication and the use of information rather than merely making information available. As the authors say: “the skills needed to convey an adequate warning extend beyond knowledge of the scientific information regarding the risk and an ability to write clearly and logically (p. 9) . . . Many of these informational efforts are addressing issues that are at the boundary of individual rationality” (p. 188). Informational programs address a major source of market failure and can, therefore, be an alternative to more stringent forms of regulation and more direct technological controls. In these ways the US shift towards informational approaches in the 1980s might be justified. M-V also argue that because consumer and worker preferences differ, optimal regulation should differ across them. Finally, it must be conceded that informational approaches are not always relevant and not always effective, but then the same might be said of other regulatory strategies. The important consideration would seem to be that these approaches be recognized as belonging to the regulator’s repertoire. Readers would do well to go on to Viscusi’s other recent works (1991, 1992).
References Train, K.E., 1991, Optimal regulation: the economic theory of natural monopoly (MIT Press, Cambridge, MA). Viscusi, W.K., 1991, Reforming products liability (Harvard University Press, London). Viscusi, W.K., 1992, Smoking: making the risky decision (Oxford University Press, New York).
D. McL. Lamberton Research School of Social Sciences Australian National University Canberra, ACT, Australia
Reviews
Wesley A. Magat and W. Kip Viscusi, 1992, Informational Approaches Regulation (MIT Press, Cambridge, MA).
201
to
This is the first in the ‘Regulation of Economic Activity’ series initiated in 1981 to draw attention explicitly in its title to informational aspects. Comparison with the literature reviewed by Besanko and Sappington (1987) reveals specialisms, emphasizes the need to widen the scope of formal research, and suggests some new approaches to designing regulatory policy. B-S surveyed contributions on designing regulatory policy with limited information. The limitation was on the regulator’s information about technological and demand conditions, for the most part in natural monopoly settings. Their broad conclusion was that optimal regulatory policy differed significantly in these circumstances from regulatory models where the regulator is assumed to be perfectly informed about the environment. They judged this to be “a relatively new field of research” (p. 71) and it would seem to remain so: Kenneth Train’s otherwise excellent coverage (1991) of optimal regulation brushes aside information asymmetries and the regulator’s beliefs. M-V in contrast focus on information provision to alter economic behaviour: “Whether it be in the home, the workplace, or the supermarket, Americans are constantly confronting information mandated by various government laws and regulations . . [However,] we are only beginning to understand how to effectively use information policies in situations where consumers and workers lack adequate information” (Preface). M-V explore economic and cognitive issues that pertain to the information transfer mechanisms involved. They provide new insight into how people respond to risk information and suggest guidelines for information provision policies. The hope that the pervasiveness of the information-theoretic aspects would be breaking down the specialisms with their theoretical compartmentalization is quickly dashed. There is not a single common item in the quite lengthy reference lists in these two books. Linking of the formal research programs could, therefore, be beneficial. The least satisfactory feature of the formal research surveyed by B-S is its treatment of the information processes involved: how do the regulator and the regulated learn and at what cost? Static asymmetries need to be replaced by on-going learning processes, comparable to those M-V investigate. With information processing in all its forms now the dominant resource-using activity, much more explicit attention to the informational approaches in both theory and regulatory practice is warranted. The primary M-V case study is the use of product labels to reduce the health risks of hazardous pesticides and chemicals. Their second case study pertains to carcinogenic food substances warnings. Their final empirical study shifts from health risks to those involving only financial losses and examines home energy audits, addressing the format and structure of the
202
Book Reviews
energy efficiency information presented and its effect on consumer behaviour. This is thorough interdisciplinary work, drawing upon economics, psychology, decision sciences and marketing. It should put pay to the notion that informational regulations are a failure. They need not fail, provided due attention is given to the M-V findings that are concerned to achieve communication and the use of information rather than merely making information available. As the authors say: “the skills needed to convey an adequate warning extend beyond knowledge of the scientific information regarding the risk and an ability to write clearly and logically (p. 9) . . . Many of these informational efforts are addressing issues that are at the boundary of individual rationality” (p. 188). Informational programs address a major source of market failure and can, therefore, be an alternative to more stringent forms of regulation and more direct technological controls. In these ways the US shift towards informational approaches in the 1980s might be justified. M-V also argue that because consumer and worker preferences differ, optimal regulation should differ across them. Finally, it must be conceded that informational approaches are not always relevant and not always effective, but then the same might be said of other regulatory strategies. The important consideration would seem to be that these approaches be recognized as belonging to the regulator’s repertoire. Readers would do well to go on to Viscusi’s other recent works (1991, 1992).
References Train, K.E., 1991, Optimal regulation: the economic theory of natural monopoly (MIT Press, Cambridge, MA). Viscusi, W.K., 1991, Reforming products liability (Harvard University Press, London). Viscusi, W.K., 1992, Smoking: making the risky decision (Oxford University Press, New York).
D. McL. Lamberton Research School of Social Sciences Australian National University Canberra, ACT, Australia