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Regulating False Disclosure

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Abstract

Firms communicate private information about product quality through a combination of pricing and disclosure where disclosure may be deliberately false. In a competitive setting, we examine the effect of regulation penalizing false disclosure. Stronger regulation reduces the reliance on price signaling, thereby lowering market power and consumption distortions; however, it often creates incentives for excessive disclosure. Regulation is suboptimal unless disclosure itself is inexpensive and even in the latter case, only strong regulation is welfare improving. Weak regulation is always worse than no regulation. Even high quality firms suffer due to regulation.

Suggested Citation

  • Maarten C. W. Janssen & Santanu Roy, 2017. "Regulating False Disclosure," Vienna Economics Papers vie1705, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:vie1705
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    Cited by:

    1. Kemal Kıvanç Aköz & Cemal Eren Arbatli & Levent Celik, 2020. "Manipulation Through Biased Product Reviews," Journal of Industrial Economics, Wiley Blackwell, vol. 68(4), pages 591-639, December.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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