Working Paper: NBER ID: w11937
Authors: V. Joseph Hotz; Mo Xiao
Abstract: We examine the incentives for firms to voluntarily disclose otherwise private information about the quality attributes of their products. In particular, we focus on the case of differentiated products with multiple attributes and heterogeneous consumers. We show that there exist certain configurations of consumers' multi-dimensional preferences under which a firm, no matter whether producing a high- or low-quality product, may choose not to reveal the quality even with zero disclosure costs. The failure of information unraveling arises when providing consumers with more information results in more elastic demand, which triggers more intensive price competition and leads to lower prices and profits for competing firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory.
Keywords: information disclosure; multi-attribute products; consumer heterogeneity
JEL Codes: L15; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms' disclosure decisions (G38) | increased demand elasticity (D12) |
| increased demand elasticity (D12) | more intense price competition (L11) |
| distribution of consumer preferences (D11) | firms' disclosure decisions (G38) |
| mandatory disclosure laws (G38) | increased competition (L13) |
| increased competition (L13) | lower prices (P22) |
| increased consumer information (D18) | higher demand elasticity (D12) |
| higher demand elasticity (D12) | intensified price competition (L11) |
| intensified price competition (L11) | reduced profits (D33) |
| firms producing high-quality products (L15) | withhold information (D82) |