Centre for Development Economics
Department of Economics

Delhi School of Economics


Market for Gems: Information-forcing Effects of Non-Disclosure Rules


Francesco Parisi
(University of Minnesota)

(Thursday, February 29, 2024, at 3:30 PM IST )

Venue: Room no. 116


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 in these two asymmetric information problems is that imposing disclosure duties on buyers would undermine their incentives to acquire costly (but socially useful) information prior to forming a contract. This explanation lacks a key step—the failure to correct asymmetric information problems would cause an inverse adverse selection problem to arise: uninformed sellers would withdraw from the market and resources would not move to higher-valuing users. In this paper, we develop a model to 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, non-disclosure default rules yield partially separating equilibria that preserve the buyers’ incentives to acquire information. They also foster trade opportunities between expert buyers and uninformed sellers. Our results add to the existing literature by providing an additional rationale for the different treatment of buyers and sellers in asymmetric information problems.

All are cordially invited.

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