Mandatory Versus Voluntary Disclosure of Product Risks
AbstractWe 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12776.
Date of creation: Dec 2006
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Other versions of this item:
- A. Mitchell Polinsky & Steven Shavell, 2006. "Mandatory versus Voluntary Disclosure of Product Risks," Discussion Papers 06-006, Stanford Institute for Economic Policy Research.
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- 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; Forensic Economics
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-02 (All new papers)
- NEP-LAW-2007-01-02 (Law & Economics)
- NEP-PBE-2007-01-02 (Public Economics)
- NEP-REG-2007-01-02 (Regulation)
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