September 16, 2010
Law Schools, Information Asymmetries and Voluntary Disclosures
Posted by Christine Hurt

In teaching Securities Regulation, I pose a lot of questions about mandatory v. voluntary disclosure and materiality.  Perhaps that's why I see the troubles of the Law School Transparency Project as an interesting puzzle.  This project is asking all 199 law schools in the U.S. to voluntarily disclose fine-grained employment data of their graduates.  So far, 11 schools have honored responded in some way to the request (American University Washington College of Law, Ave Maria School of Law (granted extension until Thursday, September 16th), Creighton University School of Law, Northwestern University School of Law, Santa Clara University Law School, University of Colorado Law School, University of Florida Levin College of Law, University of Michigan Law School, University of Tennessee College of Law, Vanderbilt University Law School, William Mitchell College of Law), and it also appears that three of those have not made final decisions (American, Michigan and Vanderbilt).  (UPDATED:  I earlier misinterpreted the term "responded."  None of the responders have actually provided information but have in fact declined to do so.)  So, at least 95% of the law school world is still waiting.  (NLJ story here.)  Though I agree that the world would be a better place if all 199 law schools disclosed, I don't blame the waiting schools.  (Note:  I have had no conversations at my school with anyone about this topic.)

I'm always suspicious of scholars who see prisoner's dilemmas everywhere, but I think the decision of whether to disclose or not here is pretty close.  At the most basic level, the schools would all be better if they coordinated a response.  And unanimous nondisclosure seems to have worked fairly well.  The interesting facet of this game is that an individual school may not know whether the facts it would disclose (and the other players) would be evidence of its guilt or not.

Here's what I mean:  In the prisoner's dilemma, both prisoners know that the facts they can divulge or deny are evidence of guilt which would lead to a prison sentence.  That's how we can model pretty easily whether prison will flow for Prisoner B from the confession of Prisoner A.  And because we know this, we can determine that the dominant strategy is confessing.  However, Law School B's placement data is a tree falling in the wilderness by itself.  The data only looks incriminating if it is worse than Law School A's.  Of course, some schools' data may be incriminating in and of itself if it is charging a substantial sum and the vast majority of its graduates secure employment at a tiny fraction of that and what would be average salaries with no graduate degree.  Similarly, some schools may look like excellent investments standing alone.  But for most schools, its data would need to be compared to its competitor schools.

So, this complicates the decision.  If Law School B's data is worse than Law School A's, Law School C's and Law School D's, what are the possible outcomes?  If they are all silent (status quo now), then B is fine.  If all three disclose but B, then how is that for B?  The market will assume that B's data is worse, but they may not discount B as much as they would if they had the data.  If Law School B's data is better, then the market will underprice B, but B can correct this by disclosing at any time.  If B doesn't realize its data is bad, then it might disclose first, which will then prompt the other schools to disclose because they know their data is better.  So, it seems like the winning move in an environment of uncertainty (and in an interative game) is not to disclose.

Are there any benefits of being a first discloser?  It might signal a transparency to the marketplace that applicants may respond to, resulting in a type of branding as a school concerned with student debt and student outcomes.  Also, A, C and D may not automatically disclose just because their data is better.  They may be concerned about other competitors as well or may just not want to disclose in principal.

So, does this mean that I would advocate for mandatory disclosure to combat the rational decision to not disclose?  Perhaps a new ABA rule to mandate individual-level placement disclosure?  Granted, there are some cost concerns (though schools seem to compile the info anyway) and privacy concerns (graduates respond to surveys because anonymity is guaranteed).  Could it also be that we are entering into a "market for lemons" era for law schools?  Applicants may begin to automatically discount the value of every law school because of the known information asymmetry as to value?  Instead of changing the "caveat emptor" status quo, can we rely on the market to prompt law schools to try to signal their value with voluntary disclosures and warranties?

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