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Mandatory Versus Voluntary Disclosure in Markets with Informed and Uninformed Customers

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  • Michael J. Fishman
  • Kathleen M. Hagerty
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    Abstract

    Numerous rules mandate the disclosure of sellers' information. This article analyzes two questions regarding disclosure: (i) Why wouldn't sellers voluntarily disclose their information? and (ii) Who gains and who loses with mandatory disclosure? Previous analyses assume that all customers are knowledgeable enough to understand a seller's disclosure, and a key result is that there is no role for mandatory disclosure. Either voluntary disclosure is forthcoming, or if it is not, no one prefers mandatory disclosure. We generalize the standard model by considering the case in which not all customers understand a seller's disclosure. We show that if the fraction of customers who can understand a disclosure is too low, voluntary disclosure may not be forthcoming. If so, mandatory disclosure benefits informed customers, is neutral for uninformed customers, and harms the seller. Our results suggest that we should find mandatory disclosure in markets where product information is relatively difficult to understand. Copyright 2003, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal The Journal of Law, Economics, and Organization.

    Volume (Year): 19 (2003)
    Issue (Month): 1 (April)
    Pages: 45-63

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    Handle: RePEc:oup:jleorg:v:19:y:2003:i:1:p:45-63

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    Cited by:
    1. Rick Harbaugh & John W. Maxwell & Beatrice Roussillon, 2006. "The Groucho Effect of Uncertain Standards," Working Papers 2006-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    2. Agarwal, Vikas & Mullally, Kevin & Tang, Yuehua & Yang, Baozhong, 2013. "Mandatory portfolio disclosure, stock liquidity, and mutual fund performance," CFR Working Papers 13-04, University of Cologne, Centre for Financial Research (CFR).
    3. Ran Spiegler, 2006. "The Market for Quacks," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1113-1131.
    4. Marco Di Maggio & Marco Pagano, 2012. "Financial Disclosure and Market Transparency with Costly Information Processing," EIEF Working Papers Series 1212, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2012.
    5. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    6. V. Joseph Hotz & Mo Xiao, 2006. "Strategic Information Disclosure: The Case of Multi-Attribute Products with Heterogeneous Consumers," NBER Working Papers 11937, National Bureau of Economic Research, Inc.
    7. Andrew F. Daughety & Jennifer F. Reinganum, 2006. "Products Liability, Signaling and Disclosure," Vanderbilt University Department of Economics Working Papers 0625, Vanderbilt University Department of Economics.
    8. Alexander L. Brown & Colin F. Camerer & Dan Lovallo, 2012. "To Review or Not to Review? Limited Strategic Thinking at the Movie Box Office," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 1-26, May.
    9. Benito Arruñada, 2008. "Mandatory accounting disclosure by small private companies," Economics Working Papers 1090, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Ting Liu & Monic Jiayin Sun, 2007. "Informal Payments in Developing Countries' Public Health Sectors¤," Boston University - Department of Economics - Working Papers Series WP2007-032, Boston University - Department of Economics.
    11. Itay Goldstein & Yaron Leitner, 2013. "Stress tests and information disclosure," Working Papers 13-26, Federal Reserve Bank of Philadelphia.
    12. Nikolaev, V. & Lent, L.A.G.M. van, 2005. "The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate Disclosure Policy," Discussion Paper 2005-67, Tilburg University, Center for Economic Research.
    13. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Vanderbilt University Department of Economics Working Papers 0703, Vanderbilt University Department of Economics.
    14. Dziuda, Wioletta, 2011. "Strategic argumentation," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1362-1397, July.
    15. Junmin Wan, 2004. "Responses of Consumers to the Mandatory Disclosure of Information: Evidence from Natural Experiments in Japanese Inter-brand Cigarette Demands," Discussion Papers in Economics and Business 04-13-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Feb 2006.
    16. Hyytinen, Ari & Väänänen, Lotta, 2004. "Mandatory Auditor Choice and Small Finance: Evidence from Finland," Discussion Papers 950, The Research Institute of the Finnish Economy.

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