Mandatory Versus Voluntary Disclosure of Product Risks

34 Pages Posted: 23 Dec 2006 Last revised: 22 Jun 2007

See all articles by A. Mitchell Polinsky

A. Mitchell Polinsky

Stanford Law School; National Bureau of Economic Research (NBER)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2006

Abstract

We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess -- since such information has value to consumers -- voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent.

Suggested Citation

Polinsky, A. Mitchell and Shavell, Steven, Mandatory Versus Voluntary Disclosure of Product Risks (December 2006). NBER Working Paper No. w12776. Available at SSRN: https://ssrn.com/abstract=953199

A. Mitchell Polinsky (Contact Author)

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Steven Shavell

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