Quality Testing and Disclosure

Abstract

Sellers are often more able than consumers to test product quality. We show that whether such firms will voluntarily test quality and disclose what they learn depends in a paradoxical way upon the presence of mandatory disclosure rules: only if disclosure is mandatory will a seller not test and disclose. We then ask whether it is even desirable for consumers to be informed about quality at the time they purchase. We show that if information about product quality can be obtained only after all production decisions have been made, and if income effects are negligible, then consumers andfirms will agree that a regime in which consumers are uninformed (informed) is preferable to a regime in which they are informed (uninformed) if income and quality are complements (substitutes) in utility. Consumers and firms can disagree-in either way-about which regime is better if income effects are not negligible.