Mandatory vs. Voluntary Disclosure in Markets with Informed and Uninformed Customers

Posted: 10 Jan 2003

Multiple version iconThere are 2 versions of this paper

Abstract

Numerous rules mandate the disclosure of sellers' information. This article analyzes two questions regarding disclosure: (i) Why wouldn't sellers voluntarily disclose their information? and (ii) Who gains and who loses with mandatory disclosure? Previous analyses assume that all customers are knowledgeable enough to understand a seller's disclosure, and a key result is that there is no role for mandatory disclosure. Either voluntary disclosure is forthcoming, or if it is not, no one prefers mandatory disclosure. We generalize the standard model by considering the case in which not all customers understand a seller's disclosure. We show that if the fraction of customers who can understand a disclosure is too low, voluntary disclosure may not be forthcoming. If so, mandatory disclosure benefits informed customers, is neutral for uninformed customers, and harms the seller. Our results suggest that we should find mandatory disclosure in markets where product information is relatively difficult to understand.

Suggested Citation

Fishman, Michael Jay and Hagerty, Kathleen M., Mandatory vs. Voluntary Disclosure in Markets with Informed and Uninformed Customers. The Journal of Law, Economics, and Organization, Vol. 19, No. 1, pp. 45-63, 2003. Available at SSRN: https://ssrn.com/abstract=355183

Michael Jay Fishman (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States
847-491-8332 (Phone)
847-491-5719 (Fax)

Kathleen M. Hagerty

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8345 (Phone)
847-491-5719 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
976
PlumX Metrics