Optimal (Non-)Disclosure Defaults

33 Pages Posted: 30 Apr 2024 Last revised: 3 May 2024

See all articles by Giuseppe Dari‐Mattiacci

Giuseppe Dari‐Mattiacci

University of Amsterdam; Tinbergen Institute; European Corporate Governance Institute (ECGI)

Sander Onderstal

University of Amsterdam; Tinbergen Institute

Francesco Parisi

University of Minnesota - Law School; University of Bologna; University of Miami, School of Law

Ram Singh

Delhi School of Economics - University of Delhi

Multiple version iconThere are 3 versions of this paper

Date Written: April 27, 2024

Abstract

Sellers are generally required to disclose “negative” information about hidden defects of the products they sell. By contrast, buyers are generally under no comparable duties to disclose “positive” information about hidden qualities of the products they buy. The leading explanation for the law’s disparate treatment of buyers and sellers is that imposing disclosure duties on buyers would undermine their incentives to acquire costly (but socially useful) information prior to the purchase. This explanation lacks a key step: the failure to correct asymmetric information problems ex post would cause an inverse adverse selection problem ex ante. Uninformed sellers would withdraw from the market and resources would not move to higher-valuing (informed) buyers. In this paper, we develop a model that balances the benefits of information acquisition with the costs of asymmetric information, and study the incentives created by disclosure and non-disclosure rules. We show that when parties can contract around defaults at a cost, the choice of alternative disclosure rules makes a difference. Unlike disclosure rules, nondisclosure default rules yield partially separating equilibria that preserve the buyers’ incentives to acquire information and foster trade opportunities between expert buyers and uninformed sellers.

Keywords: asymmetric information, penalty default rules, inverse adverse selection

JEL Classification: D44, D82, D86, K12

Suggested Citation

Dari-Mattiacci, Giuseppe and Onderstal, Sander and Parisi, Francesco and Singh, Ram, Optimal (Non-)Disclosure Defaults (April 27, 2024). Minnesota Legal Studies Research Paper No. 24-13, University of Miami Legal Studies Research Paper Forthcoming, Amsterdam Law School Research Paper No. 2024-14, Amsterdam Center for Law & Economics Working Paper No. 2024-08, Available at SSRN: https://ssrn.com/abstract=4811520 or http://dx.doi.org/10.2139/ssrn.4811520

Giuseppe Dari-Mattiacci

University of Amsterdam ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Sander Onderstal

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Francesco Parisi (Contact Author)

University of Minnesota - Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

University of Bologna ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

University of Miami, School of Law ( email )

Ram Singh

Delhi School of Economics - University of Delhi ( email )

Delhi School of Economics
University of Delhi, North Campus
Delhi, Delhi 110007
India

HOME PAGE: http://www.econdse.org/ramsingh

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