Optimal Disclosure Mandate in Supply Chains

We study a model in which a firm can acquire conclusive evidence about its suppliers social and environmental impacts. We identify the disclosure mandate that maximizes market information. A disclosure mandate determines whether (i) the firms investigation effort is observable by the market and (ii) obtained evidence is disclosed to the market. When the supply chain visibility is low, the firm does not know its suppliers impacts. The combination of covert investigation and voluntary disclosure of obtained evidence incentivizes the firm to acquire evidence and constitutes the optimal disclosure mandate. When the supply chain visibility is high, the firm knows its suppliers impacts. Overt investigation and mandatory disclosure of obtained evidence together enable the firm to signal its private knowledge through the chosen investigation effort and maximize market information. The sharp contrast of these two cases highlights the importance of supply chain visibility in determining the optimal mandate.