Regulating False Disclosure

70 Pages Posted: 1 Dec 2017

See all articles by Maarten Janssen

Maarten Janssen

University of Vienna - Faculty of Business, Economics, and Statistics

Santanu Roy

Southern Methodist University (SMU) - Department of Economics

Date Written: November 2017

Abstract

Firms communicate private information about product quality through a combination of pricing and disclosure where disclosure may be deliberately false. In a competitive setting, we examine the effect of regulation penalizing false disclosure. Stronger regulation reduces the reliance on price signaling, thereby lowering market power and consumption distortions; however, it often creates incentives for excessive disclosure. Regulation is suboptimal unless disclosure itself is inexpensive and even in the latter case, only strong regulation is welfare improving. Weak regulation is always worse than no regulation. Even high quality firms suffer due to regulation.

Keywords: Regulation; Asymmetric Information; Disclosure; Lying; Signaling; Product Quality; Price Competition

JEL Classification: D43, D82, L13, L15

Suggested Citation

Janssen, Maarten C. W. and Roy, Santanu, Regulating False Disclosure (November 2017). CEPR Discussion Paper No. DP12450, Available at SSRN: https://ssrn.com/abstract=3079417

Maarten C. W. Janssen (Contact Author)

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Santanu Roy

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States

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