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Quality Testing and Disclosure

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Author Info

  • Steven Matthews
  • Andrew Postlewaite

Abstract

Sellers are often more able than consumers to test product quality. We show that whether such firms will voluntarily test quality and disclose what they learn depends in a paradoxical way upon the presence of mandatory disclosure rules: only if disclosure is mandatory will a seller not test and disclose. We than ask whether it is even desirable for consumers to be informed about the quality at the time they purchase. We show that if information about product quality can be obtained only after production decisions have been made, and if income effects are negligible, then consumers and firms will agree that a regime in which consumers are uninformed (informed) is preferable to a regime in which they are informed (uninformed) if income and quality are complements (substitutes) in utility. Consumers and firms can disagree -- in either way -- about which regime is better if income effects are not negligible. We conclude by discussing the desirability of mandatory testing laws.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 16 (1985)
Issue (Month): 3 (Autumn)
Pages: 328-340

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Handle: RePEc:rje:randje:v:16:y:1985:i:autumn:p:328-340

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Cited by:
  1. Anderson, Simon P & Renault, Régis, 2012. "The advertising mix for a search good," CEPR Discussion Papers 8756, C.E.P.R. Discussion Papers.
  2. Michael Ostrovsky & Michael Schwarz, 2008. "Information Disclosure and Unraveling in Matching Markets," NBER Working Papers 13766, National Bureau of Economic Research, Inc.
  3. Ennio Bilancini & Leonardo Boncinelli, 2014. "Disclosure of information in matching markets with non-transferable utility," Center for Economic Research (RECent) 094, University of Modena and Reggio E., Dept. of Economics.
  4. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Communicating quality: a unified model of disclosure and signalling," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 973-989.
  5. A. Mitchell Polinsky & Steven Shavell, 2006. "Mandatory Versus Voluntary Disclosure of Product Risks," NBER Working Papers 12776, National Bureau of Economic Research, Inc.
  6. Levent Celik, 2014. "A More General Framework to Analyze Whether Voluntary Disclosure is Insufficient or Excessive," Review of Industrial Organization, Springer, vol. 44(2), pages 161-178, March.
  7. Isabelle Brocas & Juan Carrillo & Thomas Palfrey, 2012. "Information gatekeepers: theory and experimental evidence," Economic Theory, Springer, vol. 51(3), pages 649-676, November.
  8. 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.
  9. Panos Markopoulos & Kartik Hosanagar, 2013. "A Model of Product Design and Information Disclosure Investments," Working Papers 13-25, NET Institute.
  10. Maxim Ivanov, 2013. "Information revelation in competitive markets," Economic Theory, Springer, vol. 52(1), pages 337-365, January.
  11. Andrew F. Daughety & Jennifer F. Reinganum, 2011. "Economic Analysis of Products Liability: Theory," Vanderbilt University Department of Economics Working Papers 1107, Vanderbilt University Department of Economics.
  12. Ching-to Albert MA & Henry Y. Mak, 2012. "Information Disclosure and the Equivalence of Prospective Payment and Cost Reimbursement," Boston University - Department of Economics - Working Papers Series WP2012-008, Boston University - Department of Economics.
  13. Vincze, János, 2010. "Miért és mitől védjük a fogyasztókat?. Aszimmetrikus információ és/vagy korlátozott racionalitás
    [Asymmetric information and/or bounded rationality: why are consumers protected and from
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 725-752.

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