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Mandatory Versus Voluntary Disclosure of Product Risks

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  • A. Mitchell Polinsky
  • 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.

Suggested Citation

  • A. Mitchell Polinsky & Steven Shavell, 2006. "Mandatory Versus Voluntary Disclosure of Product Risks," NBER Working Papers 12776, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12776
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    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, May.
    2. 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.
    3. Steven Shavell, 2003. "Economic Analysis of Accident Law," NBER Working Papers 9694, National Bureau of Economic Research, Inc.
    4. 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 651-677, October.
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    6. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    7. Steven Matthews & Andrew Postlewaite, 1985. "Quality Testing and Disclosure," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 328-340, Autumn.
    8. 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.
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    Citations

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    Cited by:

    1. Ursino, Giovanni & Piccolo, Salvatore & Tedeschi, Piero, 2012. "Deceptive advertising with rational buyers," MPRA Paper 42553, University Library of Munich, Germany.
    2. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2010. "Worried about Adverse Product Effects? Information Disclosure and Consumer Awareness," TSE Working Papers 10-157, Toulouse School of Economics (TSE).
    3. Iwata, Hiroki, 2014. "Disclosure of environmental information and investments of firms," MPRA Paper 54784, University Library of Munich, Germany.
    4. Li, Sanxi & Peitz, Martin & Zhao, Xiaojian, 2016. "Information disclosure and consumer awareness," Journal of Economic Behavior & Organization, Elsevier, vol. 128(C), pages 209-230.
    5. repec:bla:jindec:v:65:y:2017:i:2:p:309-335 is not listed on IDEAS
    6. Leitner, Yaron & Yilmaz, Bilge, 2016. "Regulating A Model," Working Papers 16-31, Federal Reserve Bank of Philadelphia.
    7. Saak, Alexander E., 2016. "Delegation of quality control in value chains:," IFPRI discussion papers 1526, International Food Policy Research Institute (IFPRI).
    8. Saak, Alexander E., 2016. "The Value of Delegated Quality Control and Market Size with an Application to Kyrgyzstan Dairy," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235707, Agricultural and Applied Economics Association.
    9. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Products Liability, Signaling and Disclosure," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(1), pages 106-126, March.
    10. 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.
    11. Simone Ghislandi & Michael Kuhn, 2016. "Asymmetric information in the regulation of the access to markets," Department of Economics Working Papers wuwp219, Vienna University of Economics and Business, Department of Economics.
    12. Corts, Kenneth S., 2014. "The social value of information on product quality," Economics Letters, Elsevier, vol. 122(2), pages 140-143.
    13. Chen Chun-Yuan, 2016. "D&O Insurance, Corporate Governance and Mandatory Disclosure: An Empirical Legal Study of Taiwan," Asian Journal of Law and Economics, De Gruyter, vol. 7(1), pages 19-62, April.
    14. Pierre Fauvet & Sébastien Rouillon, 2016. "Would you trust lobbies?," Public Choice, Springer, vol. 167(3), pages 201-219, June.
    15. repec:gam:jgames:v:8:y:2017:i:3:p:39-:d:111882 is not listed on IDEAS
    16. Kenneth S. Corts, 2014. "Finite Optimal Penalties for False Advertising," Journal of Industrial Economics, Wiley Blackwell, vol. 62(4), pages 661-681, December.
    17. Arnaud Dellis & Mandar Oak, 2017. "Subpoena Power and Information Transmission," School of Economics Working Papers 2017-05, University of Adelaide, School of Economics.
    18. Salvatore Piccolo & Piero Tedeschi & Giovanni Ursino, 2015. "How limiting deceptive practices harms consumers," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 611-624, September.

    More about this item

    JEL classification:

    • 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

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