Disclosure Of Deficiencies Research Articles

Unaware consumers and disclosure of deficiencies

We analyze firms' incentives to disclose deficiencies that reduce the quality of goods when consumers lack information. We distinguish two types of information: First, only some consumers are aware of the existence of deficiencies. Second, only some consumers have the expertise to infer the true levels of deficiencies once they are aware of the existence of deficiencies. We show that the interplay of awareness and expertise affects firms' incentives to disclose. In particular, an equilibrium where both firms remain silent can exist. In addition, we show that whether an increase in competition leads to more or less disclosure depends on the levels of awareness and expertise in the market. We highlight that the effectiveness of policy interventions depends on the composition of the consumer side.