Imperfect Signals and Product Safety Disclosure: A Shepherd's Dilemma

45 Pages Posted: 9 Nov 2007

See all articles by Glenn David Sheriff

Glenn David Sheriff

National Center for Environmental Economics, US EPA

Daniel Osgood

Columbia University

Date Written: November 7, 2007

Abstract

We study dynamic markets where product safety is unobserved by consumers. Perfect, but costly, audits and an exogenous noisy signal can provide information regarding seller type. Without the noisy signal, sellers do not disclose product safety without auditing. If audits are too expensive, a pooling equilibrium can result in consumption of unsafe goods. Even a noisy quality signal perfectly identifies unsafe goods by giving sellers incentives to disclose type without audits. Introducing a signal helps buyers, but its effect on sellers is ambiguous. Even if sellers benefit, they always suffer from increases in precision.

Keywords: adverse selection, product safety, noisy signals, credence goods, climate forecast, livestock disease

JEL Classification: D18, D82, L15, Q13

Suggested Citation

Sheriff, Glenn David and Osgood, Daniel, Imperfect Signals and Product Safety Disclosure: A Shepherd's Dilemma (November 7, 2007). Available at SSRN: https://ssrn.com/abstract=1027752 or http://dx.doi.org/10.2139/ssrn.1027752

Glenn David Sheriff (Contact Author)

National Center for Environmental Economics, US EPA ( email )

Washington, DC 20460
United States

Daniel Osgood

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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