Naivety about hidden information: An experimental investigation

Abstract

The unraveling prediction of disclosure theory relies on the idea that strategic forces lead firms (information senders) to voluntarily disclose information about the quality of their products provided the information disclosed is verifiable and the costs of disclosure are negligible. This theoretical prediction requires that consumers (information receivers) hold correct beliefs about non-disclosed information and, in equilibrium, treat all non-disclosed information with extreme skepticism. Previous research finds that receivers are insufficiently skeptical, or in other words are naive, about non-disclosed information, which leads to the failure of unraveling. This paper examines the extent to which naivety responds systematically to features of the decision environment, namely the availability of opportunities to communicate with others (Consultation treatment) and the context of the experimental setting (Context treatment, based on hygiene ratings). We find that complete unraveling fails to occur in all our treatments. Receiver's beliefs and guesses about non-disclosed information are similar across the Consultation and Context treatments relative to the Baseline implying that receivers are naive about non-disclosed information under naturalistic features that exist in field settings. We also find that senders are partly to blame for the lack of unraveling, as intermediate types would gain from disclosing more often given the observed receiver behavior.