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What the Seller Won't Tell You: Persuasion and Disclosure in Markets

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  • Paul Milgrom

Abstract

Imagine that you are considering an investment in a new public offering of a firm's shares. The firm's officers make a presentation that includes an audited financial statement, an earnings forecast reviewed by its prestigious investment bankers, and an impressive demonstration of its new technology. Or suppose that you are buying a new furnace to replace an old one that is not working well. The salesman displays a chart showing that the projected total life-cycle cost of one particular model, including capital costs and fuel usage over the projected lifetime of the furnace, is lower than that of some competing models you have considered. This paper reviews the theoretical arguments about how sellers disclose information in an attempt to encourage buyers, and the potential role for regulation in encouraging efficient disclosure of information. How well does a system of private reporting work? When should we expect all the relevant information to be reported? If testing and reporting by the seller are costly, will too little testing and reporting be done? Or too much? When some information is withheld, what sort of information is withheld? How do rational buyers respond to such withholding? How are prices and welfare affected? What role is there for laws and regulations to improve the functioning of markets? We address these questions by studying the theory of persuasion games -- games in which one or more sellers provide verifiable information to buyers to influence the actions they take.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 22 (2008)
Issue (Month): 2 (Spring)
Pages: 115-131

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Handle: RePEc:aea:jecper:v:22:y:2008:i:2:p:115-131

Note: DOI: 10.1257/jep.22.2.115
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  1. H.S. Shin, 1994. "News Management and the Value of Firms," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 58-71, Spring.
  2. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
  3. Grossman, S J & Hart, O D, 1980. " Disclosure Laws and Takeover Bids," Journal of Finance, American Finance Association, vol. 35(2), pages 323-34, May.
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  6. Shin, Hyun Song, 2002. "Disclosures and Asset Returns," CEPR Discussion Papers 3345, C.E.P.R. Discussion Papers.
  7. Boyan Jovanovic, 1982. "Truthful Disclosure of Information," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 36-44, Spring.
  8. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  9. Rafael Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, 02.
  10. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  11. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  12. Rubinstein, Ariel & Glazer, Jacob, 2006. "A study in the pragmatics of persuasion: a game theoretical approach," Theoretical Economics, Econometric Society, vol. 1(4), pages 395-410, December.
  13. Akerlof, George A, 1976. "The Economics of Caste and of the Rat Race and Other Woeful Tales," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 599-617, November.
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Cited by:
  1. Mingfeng Lin & Paulo Goes, 2012. "The Appeal of Third-party Certifications: Information Unraveling in Natural Experiments," Working Papers 12-02, NET Institute.
  2. Denter, Philipp & Morgan, John & Sisak, Dana, 2011. ""Where Ignorance is Bliss, 'tis Folly to be Wise": Transparency in Contests," Economics Working Paper Series 1128, University of St. Gallen, School of Economics and Political Science.
  3. de Meza, David Emmanuel & Irlenbusch, Bernd & Reyniers, Diane, 2010. "Disclosure, Trust and Persuasion in Insurance Markets," IZA Discussion Papers 5060, Institute for the Study of Labor (IZA).
  4. De Borger, Bruno & Fosgerau, Mogens, 2012. "Information provision by regulated public transport companies," MPRA Paper 42267, University Library of Munich, Germany.
  5. Clifford Winston, 2008. "The Efficacy of Information Policy: A Review of Archon Fung, Mary Graham, and David Weil's Full Disclosure: The Perils and Promise of Transparency," Journal of Economic Literature, American Economic Association, vol. 46(3), pages 704-17, September.
  6. Di Maggio, Marco, 2009. "Sweet Talk: A Theory of Persuasion," MPRA Paper 18697, University Library of Munich, Germany.
  7. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, vol. 14(4), pages 303-331, November.
  8. Daniel Stone, 2011. "A signal-jamming model of persuasion: interest group funded policy research," Social Choice and Welfare, Springer, vol. 37(3), pages 397-424, September.
  9. Jackson, Matthew O. & Tan, Xu, 2013. "Deliberation, disclosure of information, and voting," Journal of Economic Theory, Elsevier, vol. 148(1), pages 2-30.
  10. Renault, Régis & Anderson, Simon P., 2013. "The Advertising Mix for a Search Good," Economics Papers from University Paris Dauphine 123456789/12407, Paris Dauphine University.
  11. Eső, Péter & Wallace, Chris, 2013. "Meggyőzés és megegyezés egy dinamikus alkujátékban
    [Persuasion and settlement in a dynamic bargaining game]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 930-939.

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