We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess -- since such information has value to consumers -- voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12776.
Length: Date of creation: Dec 2006 Date of revision: Handle: RePEc:nbr:nberwo:12776
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Find related papers by JEL classification: D18 - Microeconomics - - Household Behavior - - - Consumer Protection D62 - Microeconomics - - Welfare Economics - - - Externalities D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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Andrew F. Daughety & Jennifer F. Reinganum, 2005.
"Secrecy and Safety,"
American Economic Review,
American Economic Association, vol. 95(4), pages 1074-1091, September.
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Andrew F. Daughety & Jennifer F. Reinganum, 2003.
"Secrecy and Safety,"
Working Papers
0317, Department of Economics, Vanderbilt University, revised Sep 2003.
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