Working Paper: NBER ID: w12776
Authors: 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.
Keywords: disclosure; product risks; consumer welfare; liability
JEL Codes: D18; D62; D82; H23; K13; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mandatory disclosure (G38) | reduction in consumer uncertainty about product risks (D18) |
| voluntary disclosure induces firms to acquire more information about product risks (L15) | increase in social welfare (H53) |
| under negligence, outcomes of mandatory and voluntary disclosure are similar (G33) | firms take optimal care to avoid liability (K13) |
| under strict liability, firms are indifferent to the disclosure regime (G38) | equivalent outcomes for both mandatory and voluntary disclosure (H26) |