Incentives to Acquire Information under Mandatory versus Voluntary Disclosure

This article examines the incentives of a party to acquire information prior to negotiating contractual terms with a second party under two different legal regimes: mandatory versus voluntary disclosure. By assumption, information can only truthfully be disclosed but, under voluntary disclosure, having found no evidence cannot credibly be communicated. If the information-acquiring party has all the bargaining power, then, under voluntary disclosure, she will invest more in information acquisition than is welfare maximizing in many situations. At lesser bargaining power, however, this need not be the case. If information directly benefits the non-acquiring party only, then incentives to acquire under voluntary disclosure are less than under mandatory disclosure, and the latter leads to less than welfare-maximizing acquisition. Most results are independent of the underlying bargaining structure as mainly use of constraints is made that hold for equilibrium payoffs from any bargaining game. (JEL K12, D86)