Disclosure Rules in Contract Law

32 Pages Posted: 14 Jun 2017 Last revised: 17 Nov 2017

See all articles by Oren Bar-Gill

Oren Bar-Gill

Harvard Law School

Ariel Porat

Tel Aviv University; University of Chicago - Law School

Date Written: May 26, 2017


How does the prospect of sale affect the seller’s incentive to investigate — to acquire socially valuable information about the asset? How do the disclosure rules of contract law influence the investigation decision? Shavell (1994) showed that, if sellers and buyers are symmetrically informed, at the pre-investigation stage, then a mandatory disclosure rule leads to a first-best outcome, and a voluntary disclosure rule leads to a suboptimal outcome. But in many real-world cases owners of assets have better information about their assets, even before they investigate. In such asymmetric information settings, we show, mandatory disclosure no longer attains a first-best outcome. And, under certain conditions, voluntary disclosure is the more efficient rule. We further enrich the analysis by introducing a third rule: the mandatory post-disclosure rule, which requires disclosure of material information, but only after the contract is concluded. We show that this rule can be more efficient than both voluntary disclosure and mandatory (pre-contract) disclosure.

Keywords: Asymmetric Information, Information Acquisition, Disclosure Rules, Contracts, Contract Law

JEL Classification: D82, D83, D86, K12

Suggested Citation

Bar-Gill, Oren and Porat, Ariel, Disclosure Rules in Contract Law (May 26, 2017). Harvard Law School John M. Olin Center Discussion Paper No. 907; University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 813; Harvard Public Law Working Paper No. 17-34. Available at SSRN: https://ssrn.com/abstract=2985115 or http://dx.doi.org/10.2139/ssrn.2985115

Oren Bar-Gill (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Ariel Porat

Tel Aviv University ( email )

Ramat Aviv
Tel Aviv 69978, IL
972-3-6408283 (Phone)
972-3-6407260 (Fax)

HOME PAGE: http://english.tau.ac.il/profile/porata

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

HOME PAGE: http://www.law.uchicago.edu/faculty/porat

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information