Truthful Disclosure of Information

TLDR

The article examines the disclosure of quality information in markets. The study investigates whether free markets provide sufficient incentives for firms to disclose quality information. The authors find that firms disclose more than the socially optimal amount, that subsidizing sales without disclosure is the optimal policy, that mandatory disclosure is unsupported, and that these results hinge on the model’s assumption of no misrepresentation.

Abstract

This article is about disclosure of quality. The question that it seeks to answer is: Does the free market offer enough incentive for business to disclose? The article concludes that whether information is of purely private value or not, more than the socially-optimal amount of disclosure takes place. The optimal policy is for the government to subsidize sale without disclosure. The article offers no support for the policy of mandatory disclosure. The results should be viewed with care, however, as they seem to depend on special features of the model, in particular the assumed impossibility of misrepresentation.