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Mandatory versus Voluntary Disclosure of Product Risks

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  • A. Mitchell Polinsky

    ()
    (Economics Department, Stanford University)

  • Steven Shavell

Abstract

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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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 06-006.

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Date of creation: Oct 2006
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Handle: RePEc:sip:dpaper:06-006

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Keywords: product risk; information; mandatory disclosure; voluntary disclosure; negligence; strict liability;

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References

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  1. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9483, National Bureau of Economic Research, Inc.
  2. Jennifer F. Reinganum & Andrew F. Daughety, 2004. "Secrecy and Safety," Econometric Society 2004 North American Summer Meetings 53, Econometric Society.
  3. Joseph Farrell, 1985. "Voluntary Disclosure: Robustness of the Unraveling Result, and Comments on Its Importance," Working papers 374, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Steven Matthews & Andrew Postlewaite, 1985. "Quality Testing and Disclosure," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 328-340, Autumn.
  5. Steven Shavell, 1994. "Acquisition and Disclosure of Information Prior to Sale," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 20-36, Spring.
  6. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
  7. Mathios, Alan D, 2000. "The Impact of Mandatory Disclosure Laws on Product Choices: An Analysis of the Salad Dressing Market," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 651-77, October.
  8. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. 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.
  2. 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.
  3. Iwata, Hiroki, 2014. "Disclosure of environmental information and investments of firms," MPRA Paper 54784, University Library of Munich, Germany.

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