Mandatory versus Voluntary Disclosure of Product Risks
A. Mitchell Polinsky
Stanford Law School; National Bureau of Economic Research (NBER)
Harvard Law School; National Bureau of Economic Research (NBER)
Stanford Law and Economics Olin Working Paper No. 327
Harvard Law and Economics Discussion Paper No. 564
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.
Number of Pages in PDF File: 33
Keywords: product risk, information, mandatory disclosure, voluntary disclosure, negligence, strict liability
JEL Classification: D18, D62, D82, H23, K13, L15
Date posted: October 23, 2006
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