Mandatory Versus Voluntary Disclosure in Markets with Informed and Uninformed Customers

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118 Scopus citations

Abstract

Numerous rules mandate the disclosure of sellers' information. This article analyzes two questions regarding disclosure: (i) Why wouldn't sellers voluntarily disclose their information? and (ii) Who gains and who loses with mandatory disclosure? Previous analyses assume that all customers are knowledgeable enough to understand a seller's disclosure, and a key result is that there is no role for mandatory disclosure. Either voluntary disclosure is forthcoming, or if it is not, no one prefers mandatory disclosure. We generalize the standard model by considering the case in which not all customers understand a seller's disclosure. We show that if the fraction of customers who can understand a disclosure is too low, voluntary disclosure may not be forthcoming. If so, mandatory disclosure benefits informed customers, is neutral for uninformed customers, and harms the seller. Our results suggest that we should find mandatory disclosure in markets where product information is relatively difficult to understand.

Original languageEnglish (US)
Pages (from-to)45-63
Number of pages19
JournalJournal of Law, Economics, and Organization
Volume19
Issue number1
DOIs
StatePublished - Apr 2003

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management
  • Law

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