Download this Paper Open PDF in Browser

Disclosure Rules in Contract Law

Harvard Law School John M. Olin Center Discussion Paper No. 907

University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 813

32 Pages Posted: 14 Jun 2017 Last revised: 23 Aug 2017

Oren Bar-Gill

Harvard Law School

Ariel Porat

Tel Aviv University; University of Chicago - Law School

Date Written: May 26, 2017

Abstract

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. Available at SSRN: https://ssrn.com/abstract=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
Israel
972-3-6408283 (Phone)
972-3-6407260 (Fax)

HOME PAGE: http://www.law.tau.ac.il/Heb/?CategoryID=357&ArticleID=388

University of Chicago - Law School ( email )

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

Paper statistics

Downloads
127
Rank
189,944
Abstract Views
491